As reported on January 21, 2010 on National Public Radio, personal bankruptcies rose more than 30 percent last year, with more than 1.4 million protection filings. Many middle-class Americans sought relief after losing jobs, seeing their businesses fail or facing foreclosure.  

In 2005, Congress overhauled the nation's bankruptcy laws (see "How Important Were the '05 Bankruptcy Law Changes?") with the intention of limiting the ability of many individuals to get rid of their debt — especially through the use of Chapter 7 of the bankruptcy code. But in this faltering economy, the law's impact has been limited; as I recently discussed here, bankruptcy filings had returned to pre-2005 levels by the middle of 2009.

In fact, economic conditions are leading far more people into Chapter 7, where assets are sold to pay off debts and what can't be paid is absolved, instead of Chapter 13. In a Chapter 13 bankruptcy filing - also called a wage earner's plan - an individual signs up for a three or five year repayment plan (see "Chapter 13: Making the Plan Work") and, in return, gets to keep certain assets. Creditors often get more money in Chapter 13 filings than they would under Chapter 7, although debtors can obtain a discharge of certain debts through Chapter 13 as well.

The recent NPR article further explains that, although bankruptcy is never pretty, it does provide a fresh start for individuals, particularly those that have been using credit to stay afloat after a job loss or failed business venture. 

-Drew Broaddus