Personal bankruptcy typically is considered the debt management alternative of last resort for the reason that the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for a period of 10 years, and this can make it difficult to obtaining credit, buying a home, getting life insurance, or sometimes getting a job. Yet, it is a legal process that gives a fresh start for people who could not satisfy their debts. People who follow the bankruptcy rules obtain a discharge which is a court order that states they don't need to repay certain debts.

The consequences of bankruptcy are significant and will need careful consideration.  Other factors to consider: Effective October 2005, Congress made sweeping changes to the laws of bankruptcy.  The net effect of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 instead of Chapter 7.  Chapter 13 lets you, if you have a solid income, to keep your property, which can be a mortgaged house or auto, which you might otherwise lose.  In Chapter 13, the court approves a repayment plan that lets you use your future income to pay in full your debts during a three-to-five-year period, instead of surrendering any property.  After you have made all the payments under the plan, you get a discharge of your debts. 

Chapter 7, referred as straight bankruptcy, consists of the sale of all assets that aren't exempt.  Exempt property may consist of cars, work-related tools, and basic household furnishings.  Some of your property may be sold by a court-appointed official, a trustee, or turned over to your creditors.  The new bankruptcy laws have changed the time period during which you can get a discharge through Chapter 7.  You now should wait 8 years after receiving a discharge in Chapter 7 before you can file again under that chapter.  The Chapter 13 waiting time is much shorter and can be as small as 2 years between filings. 

Both kinds of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, and debt collection activities.  Both also offer exemptions that allow you to keep some assets, even though exemption quantities differ by state.  Personal bankruptcy typically does not erase child support, alimony, fines, taxes, and some student loan obligations.  In addition, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or safety lien on it. 

Another big change to the bankruptcy laws involves certain hurdles that you should clear even before the bankruptcy filing, regardless of what the chapter.  You should get credit counseling from a government-approved organization within six months before filing for any bankruptcy relief.  You can find a state-by-state list of government approved credit counseling organizations at the U.S.  Trustee Program, the organization within the U.S.  Department of Justice that supervises bankruptcy cases and trustees.  Also, before filing a Chapter 7 bankruptcy case, you must satisfy a "bankruptcy means test." This test will require you to double check that your income does not exceed a particular amount.  The amount changes by state and is publicized by the U.S.  Trustee Program.