Part of our Healthy Finance Series:

Bankruptcy and Debt - Is It Right for You?

Bankruptcy - it's a scary word, isn't it?

In a way, that's good, because anything this serious should be a little scary. In the best of all scenarios, no one would have to declare bankruptcy; they'd be able to find a manageable solution to their financial distress without this final blow to their self-esteem. Sometimes, however, there truly is no other workable solution.

There are a lot of reasons why someone may be driven toward bankruptcy. They could have unexpected medical bills, overwhelmingly large credit card debt, suffered a job loss, or just gotten divorced. Life is rough and sometimes it deals us a hand we have no choice but to play out. If this is you, educating yourself on the basics of bankruptcy is the first step you need to take.

For personal bankruptcy, there are two types - which one you choose will highly depend on your individual circumstances and needs.

• Chapter 7 Bankruptcy is the liquidation of all of your assets in order to pay your creditors; after which, you are then discharged from most, or even all, the debt you claimed in the bankruptcy. Under court supervision, your assets will be collected and sold, and the cash is then distributed among those you owe money to. You do have rights to retain various properties if they fall under certain exemptions; such as your house, your car, etc. However, the rules for these exemptions are strict. If you have a lot of equity in your home, or if it is worth a lot, it probably won't fall into an exemption category. If this is the case, a Chapter 7 bankruptcy may not be right for you.
  
  
• Chapter 13 Bankruptcy allows you to keep valuable assets you may wish to retain that do not fall under any of the exemptions in a Chapter 7 bankruptcy. However, in order for this to happen, you must create a repayment plan to pay off most, or all, of your debt to your creditors. These payments generally are on a monthly basis and range from 3 to 5 years in length. By filing a Chapter 13 bankruptcy, you are protected from any collection activities whatsoever, as long as you abide by the plan. Miss even one payment, however, and the court will dismiss your case.

Both types of bankruptcy will show up on your credit report; however, a Chapter 13 bankruptcy can only appear for a total of seven years - just like any other damaging information (such as late payments).

A Chapter 7 bankruptcy will be on your credit report for at least ten years. Take this into consideration as well when deciding which type of bankruptcy will work best for your situation.

Deciding to declare bankruptcy is difficult for everyone. If this is the decision you've made, consult with an attorney to make sure you have the most up to date information that will apply to your finances. A bankruptcy attorney will know all the variances to the laws - particularly for the state you live in - how they may affect you, and will give you the assistance you need to have.