Bankruptcy

Bankruptcy can seriously impair your ability to obtain credit or employment for years, so think carefully about whether this is the right option for you. Bankruptcy should always be considered only as a last resort, and involves filing a petition in court saying that you have no assets with which to pay your debts. The court oversees settling all outstanding debts. In most cases, your creditors would like to receive at least some of what they're owed, so they may accept a smaller amount than the total bill.

There are two kinds of bankruptcy:

• A Chapter 7 bankruptcy means you sell your assets to pay creditors, and you ask to be released from any debts that you can't cover. A Chapter 7 is considered a "straight" bankruptcy and will stay on your credit record for 10 years. But new legislation makes it more difficult to resolve a bankruptcy this way.

• A Chapter 13 bankruptcy means you must comply with a court-approved plan to use your salary to pay your creditors over the next three to five years. It also means that you must pay back a larger share of what you owe than you would if you qualified to file for Chapter 7. This type of bankruptcy may carry less stigma than Chapter 7, and will stay on your credit report for seven years.

Bankruptcy probably sounds scary, and it is a drastic step. If you're considering bankruptcy, you should consult with an experienced bankruptcy lawyer who can help you understand the specific details.