Bankruptcy should always be considered as a last resort, but depending on how bad your financial situation is, you may have to file. Although it sounds scary, bankruptcy can be the solution to some people’s debt situations. Unfortunately, bankruptcy is not as uncommon as it used to be; more people declare bankruptcy each year than graduate from college. Bankruptcy is a way to start over fresh without the burden of debt, although it is certainly not painless or desirable. Besides the emotional trauma, bankruptcy stays on your credit report for 10 years, making it difficult to receive good interest rates on homes, cars, loans, and credit cards. There are a couple of good guides to help you know if you should file for bankruptcy. If your debt cannot be paid back in five years, you should consider bankruptcy. Or, if you have more consumer debt than the value of one year’s income, you should probably file. By filing for bankruptcy, you receive a discharge, a court order, which says you don’t have to pay certain of your debts and the court takes legal control over all your assets.

There are two main types of bankruptcy, Chapter 7 and Chapter 13. Chapter 7 bankruptcy, also known as ‘straight’ bankruptcy, basically erases most consumer debts, giving you a chance to make a new start. Chapter 13 bankruptcy, on the other hand, gives you time to repay your debts rather than erases them. The court sets you up with a 3-5 year repayment plan for paying your debts and at the end of that period any remaining unpaid consumer debts are erased. The main difference between these two options is in how they treat your mortgage. In Chapter 13, you are given extra time to catch up on your mortgage, so if you are behind in payments, this is probably the best option for you. Chapter 7 is better for people who either don’t have mortgages or are caught up on their payments, because otherwise you could loose your home in this type of a bankruptcy.

If you are filing for bankruptcy because you were hit with a financial crisis, such as a sudden illness or loss of job, be sure to wait to file until after the crisis has past. All consumer debts are wiped out in bankruptcy, but if you file before all your debts are final, those debts will not be covered and you will be forced to pay them. You can only declare bankruptcy once every seven years, so be wise about the timing of your filing. Also, the new bankruptcy laws that went into effect on October 17, 2005 have made it more difficult to file for bankruptcy. They require that you first seek some form of credit counseling before filing for bankruptcy. Also, filers with higher incomes may not be allowed to file for Chapter 7 bankruptcy. To learn more about The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, visit CNN Money . Again, remember that bankruptcy should be your absolute last resort to getting rid of your debt. If you are ready to take action to get out of debt, fill out our form for a free consultation and discover your options today!