Bankruptcy
If you are unable to pay your bills or face lawsuits, garnishment, or foreclosure, bankruptcy may be the best option to protect your assets and to get a fresh start. Chapter 7 and Chapter 13 bankruptcies are most often used by consumers. Below is a general outline - there are many exceptions that may apply in an individual case.
Chapter 7. Often called a "straight" or "liquidation" bankruptcy, it allows the consumer to keep motor vehicles for which payments are current, furniture and household goods, and up to $125,000 in equity in a house, mobile home or condominium. Unsecured debt such as credit cards and medical bills are wiped out, but student loans, fines, child support and alimony must still be paid. The consumer can give back a car they can't afford without penalty, even if they owe more than the car is worth.
Chapter 13. Often called a "wage-earner plan," it allows the debtor to catch up on delinquent payments on homes and motor vehicles over a period of 3-5 years while paying only the amount the consumer can afford to pay toward credit card and other unsecured debts.
Proposed Changes in Bankruptcy Law. At this time Congress is discussing changes that would allow the bankruptcy court to reduce the principal owed on a home.