The Bankruptcy Solution

Stephanie Monson was horrified when she learned that her husband had racked up more than $45,000 in credit-card bills. The debt forced Monson to file for personal bankruptcy -- and led to the couple's divorce.

With the help of an attorney, Monson filed for Chapter 7, a process that wipes the debt slate clean but also requires the liquidation of major assets. In the end, Monson's massive mound of credit-card debt was forgiven. And because she wasn't behind on her mortgage payments, her lawyer worked out a payment plan with her lender that allowed her to keep her home.

Getting out from under all that debt was a relief, but two years later the consequences continue to resonate. "My sterling credit rating went down the drain," says Monson, a mother of three who is an academic adviser at the College of St. Scholastica, in Duluth, Minn.

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The experience made Monson reassess her personal finances in a way she never thought she'd have to. She recently started using budgeting software to track her spending and get a feel for where her money is going. She now has only one credit card, which she pays off every month. Monson says she's taken all these steps because "I need to be an example for the kids."

As more people start to veer off financial course, Monson presents a reassuring example of how to slowly and deliberately rebuild a fiscal foundation after a financial crisis.

Spreading Financial Pain

Falling home prices, a swooning stock market and sky-high levels of consumer debt have left many Americans little choice but to consider personal bankruptcy. Filings rose more than 30% last year compared with 2007, to 1.1 million, according to the American Bankruptcy Institute, a research and education organization. Filings are likely to increase by another 35% in 2009, according to an ABI poll.

The pain is spreading: In the past, personal bankruptcy was mainly the province of lower-income families. Now credit counselors and bankruptcy lawyers report that more and more upper-income households are being pushed to the brink by one or more financial crises -- unaffordable home payments, job loss, divorce or a major illness that insurance doesn't cover. Laura Margulies, a consumer-bankruptcy attorney in Rockville, Md., says that until recently she was dealing with construction and real estate workers who had fallen on hard times. Now she is receiving inquiries about filing from people in all walks of life.

As a rule, personal bankruptcy should be a last resort. But as Monson discovered, there are ways of navigating the rough waters of bankruptcy that make it easier to emerge on the other side, better positioned to make a fresh start.

Tougher Bankruptcy Standards

If you're considering bankruptcy, the first thing to do is hire a lawyer. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made filing far more complex, so you should find an attorney who specializes in consumer bankruptcies (check the Web site of the American Board of Certification). Under the new law, passed after heavy lobbying by credit-card companies and other lenders, you'll have a tougher time proving that your financial straits are truly dire. To qualify, you have to provide more paperwork and meet stricter standards.

As a consumer, the two main types of bankruptcy available to you are Chapter 7 and Chapter 13. (If you owe more than $1.3 million, you can enter into Chapter 11.)