Bankruptcy is a terrifying term to most people. Many considering filing for it is already in a highly stressful situation.

Bankruptcy is a tool that gives people a second chance when there don’t appear to be any viable alternatives. Just be sure it is the right tool for your situation.

Consider these points:

1. There are two types of bankruptcy.

• Chapter 7. This eliminates essentially all of your debts (excluding student loans). The process is very straightforward, quick, and simple in most cases. Specific requirements must be met. Contact an attorney or do some research online.
• Chapter 13. This is like a bankruptcy payment plan. If you don’t qualify for Chapter 7, Chapter 13 is the alternative. You would make a single payment to a trustee, and the money would be dispersed to your creditors. This usually lasts from 3 to 5 years.

2. Consider an alternative. Sometimes bankruptcy is a practical choice, but sometimes it is not. Consider cutting back on your expenses or getting a part-time job. 

• Frequently, if you let your creditors know you’re considering bankruptcy, they will accept a reduced amount as payment in full. After all, getting something is better than nothing. You might be able to settle your debt for as little as 20% of the natural balance.

3. Understand which debts won’t be discharged. The two enormous debts not covered by bankruptcy are student loans and child support delinquency. A federal judge can choose to discharge your student loans, but it isn’t very specific.
4. What will happen to your house? This varies dramatically from state to state. Some states allow you to keep up to $1 million of equity in your home. Other states only allow $10,000. Find out before you file. 

• You might be forced to sell your house if you file Chapter 7. Chapter 13 always allows the debtor to keep the home.

   

5. What about your other property? You might be forced to sell some of your assets, including your car (depending on equity and the state you live in). Again, find out before you file the paperwork.
6. Check on your pension, 401(k), and IRA. In most states, these items are free from bankruptcy proceedings. Do your homework!
7. Consider your co-signers. If you file Chapter 7, any co-signers you have will get stuck with your debt. If you file Chapter 13, co-signers are in the clear.
8. How will it affect your personal life? Other people will probably find out about your bankruptcy. 

• You’ll have to disclose everything to the court; most records are public.
• In addition, bankruptcy notices are frequently printed in the local paper by law.

Bankruptcy provides a viable way to get a new start if you’re way over your head with debt. However, it might not be the best choice for you if you can avoid it with other options. With bankruptcy, there is a significant blemish on your credit report for at least seven years. But it is not the death of your credit.

Once all your debts have been eliminated and you’ve gone through a waiting period, you might be surprised to find that you will have decent credit. You will receive many credit card offers. 

After bankruptcy, companies can feel more comfortable that you’ll pay back your debts for two reasons:

1. You probably don’t owe any more money. You’ll be much more capable of paying back any new debt if you have little to no existing debt.
2. You can’t file for bankruptcy again for several years. Bankruptcy won’t be an option for quite a while. This can make creditors more comfortable with giving you credit.

Consider whether or not bankruptcy makes sense for your situation. As with any legal issue, an attorney can be invaluable while looking for solutions to your financial troubles.

For more information on bankruptcy, you may want to read several books before talking to a lawyer. Personal Bankruptcy Laws For Dummies by James and John Caher is an excellent introduction in plain English for non-lawyers. 

If you are a little more familiar with bankruptcy and your options, I recommend NOLO’s excellent resources, including Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, How to File for Chapter 7 Bankruptcy, and New Bankruptcy, The: Will It Work for You? – all by Cara O’Neill.