If you’re having serious financial problems, bankruptcy may seem like the answer to your problems. After all, doesn’t it erase your debt and let you start over with a clean slate?

Well, not really.

Bankruptcy stains your financial records for years, making financial recovery even more difficult. In addition, studies have shown that four out of five people who file for bankruptcy fall back into financial trouble within a few years.

As hard as it may seem, it’s better to face your situation and repay your debts. Making a systematic plan to repay your debt can resolve debt problems in most cases.

However, sometimes the only realistic way out of debt is to declare personal bankruptcy. Even so, you shouldn’t choose this option unless all other options to pay off debts have been explored and you’ve talked to an experienced bankruptcy lawyer and other financial advisors.

Bankruptcy takes two basic forms: Chapter 13 and Chapter 7. Both are filed for and carried out under the direction of a bankruptcy court.

Here’s a brief description of each.

Chapter 13 is often called the "workout plan." It allows you to repay creditors over time while preventing creditors from seizing your property. Experts believe that this option is best for people who have regular income and substantial assets. Chapter 13 bankruptcy stays on your credit record for seven years.

Chapter 7 is the more serious form of bankruptcy. It allows you to wipe out most of your debts and start over. However, it doesn’t erase back federal taxes, child support, alimony and most student loans. Under Chapter 7, you must sell off much of your personal property. The items you can keep vary from state to state, but they typically include clothing, a car, furnishings, life insurance, retirement funds and the tools of your trade. Usually your home is protected, but not always. Chapter 7 bankruptcy stays on your credit record for 10 years.

If you think you’re facing bankruptcy, first contact the National Foundation for Credit Counseling: 1-800-388-2227.

Managing Your Money: Bankruptcy–It's a Last Resort

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