Okay, you're screwed.  You just lost your job.  Your mortgage is 6 months past due and so are your credit cards.  Maybe you have some outstanding medical bills that have piled up.  Maybe your house blew away in a hurricane along with your company's office.  In any event, you have a pile of financial obligations piling up and you see no reasonable way to pay them.  The stress is making you fat, cranky, stressed and depressed, and your life seems to be in a tailspin.  Creditors call at all hours of the day and night and you have absolutely no answer for them.  Does this sound like you?  If any of this sounds familiar, know that you are not alone.  This is the scenario for millions of Americans caught up in the wall street meltdown, the housing bubble, the persistent unemployment cycle and the current gas crunch.  For those millions suffering through this mountain of debt there is relief in sight.  In fact, there's a way to get rid of all your debts with the stroke of a pen.

Bankruptcy is the one vehicle in America that allows you to remove your debts permanently.  Corporations do it all the time to reboot their finances and effectively start over.  They have no shame in filing Chapter 11, they just view it as a business transaction that allows them to move on.  Individuals need to look at it like that as well because there should be no social stigma tied to filing bankruptcy.  As an individual there are two main types of bankruptcy you can file: Chapter 7, which will eliminate all your debt and liquidate all your assets; or Chapter 13 where you keep your assets but consolidate your debt and pay it off at a reduced price.  The pros and cons of each option follows:

The Case for Filing Chapter 7 Bankruptcy

Mortgage Cost and Home Value

If you are a person who purchased a house during the housing boom (roughly between 2002 and 2008) and you are underwater on your house by more than $50,000 you should seriously consider Chapter 7.   Chapter 7 is probably the best way to get rid of your house without losing money.  Keeping the house means that you will be paying more for something that is worth less.   If you are underwater $50,000 and your home appreciates at 5%, it will be 10 years before your house is worth what you paid for it.  If you keep the house for those 10 years you are effectively throwing your money away, hoping to break even 10 years down the road.  This is not only a terrible investment, but it is also not guaranteed as home prices will probably not appreciate that fast in this terrible economy.  If you short sell your house instead of bankruptcy it will take a long time and you will probably get much less than what the house is currently worth.  Your $50,000 gap could easily turn into $75,000 or even $100,000 ALL of which you willl still owe the bank.  With a short sale you could spend the next 10 to 20 years paying for a house you no longer even own.

Credit Card Debts

Banks who bombarded you with credit card offers have no mercy when you fall behind.  As nice as they appeared to be when they enslaved you is as mean as they can be when you make late payments.  The harassment is ruthless and the late fees and penalties are outrageous.  Banks count on you paying late and build in the late fees as part of their business model.  If you continue to pay the late fees they will keep charging you.  If you do not have the means to pay your cards off QUICKLY in some lump sum payments you should file Chapter 7 and get those banks off your back.  After Chapter 7 your credit rating will be bad, but if you are late on your payments your credit is bad anyway.  Late pays stay on your credit report for 7 years just like the bankruptcy so you are doing yourself no more harm by filing Chapter 7. 

Medical Bills

When you have health insurance and you break your leg you just go to the doctor and get it fixed.  You mayor may not even look at the bill because you know that you only have to pay your co-payment of $50 per visit and say $1,000 for surgery.  if you DON'T have insurance you are forced to look at those medical bills and you see the nightmare that is our healthcare system.  Individuals are charged for EVERYTHING to include an aspirin and a pillow and the prices are outrageous.  A broken leg can run you $50,000 to $100,000 and without insurance you might wish they would have killed you instead of just breaking your leg (smile).  Chapter 7 bankruptcy will eliminate that debt and has been the cause of millions of bankruptcy filings in America.  Remember you are not alone as medical bills is one of the leading causes of bankruptcy

The Case for Filing Chapter 13 Bankruptcy

If you like your house and you are not underwater and have a steady job, but you just have an overwhelming debt problem Chapter 13 may be the better alternative for you.  Chapter 13 allows you to keep your home and your possessions while allowing you to restructure and consolidate your debt to allow you to pay it off in a reasonable monthly payment over time (2 to 5 years).  Your credit will be ruined, but again your credit is probably already bad due to late payments already on your credit record.  Chapter 13 can be very helpful if you want to maintain your life circumstance, but the debt is still there (albeit much smaller) and you are on a restricted budget.  If you can handle someone else dictating how much free cash you have to spend for the next several years then Chapter 13 is the way to greatly reduce our debt and chart a path to eventual financial freedom.