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When the amount of debt you have seems impossible to ever repay, one of the options you may consider is filing bankruptcy.  This option, of course, should never be entered into lightly.  Be sure that you have researched the pros and cons, and that you have considered alternatives to taking this drastic step. 

Discharging your Debts

Having your debts erased is called getting a "discharge" of your debts.  A discharge is actually a court order that proclaims that you do not have to pay most of your debts.  A discharge only applies to debts you incurred before you filed. 

All Debts Are Not the Same

Did you know that bankruptcy does not cover every kind of debt?  What is covered are credit card debts, medical bills, and any unsecured loans. 

What is not covered are child and spousal support, along with tax debts.  Student loans cannot be discharged except in rare cases where you can show that repaying them would be an undue burden. 

Credit Counseling Required

Under the law, you have to get credit counseling before you can file for bankruptcy.  Also, you must get additional counseling on budgeting and managing debt before your debts can be wiped out.   

To find an approved credit counseling agency in your area, visit the United States Trustee's website at www.justice.gov/ust/eo/bapcpa/ccde/index.htm

Different Types of Bankruptcy

There are two main types of bankruptcy most individual consumers consider:  Chapter 7 and Chapter 13 (referring to the chapters of the U.S. Bankruptcy Code). 

Basically, when you file Chapter 7 bankruptcy, you sell off or "liquidate" your property to cover as much of the debt as possible.  That's why Chapter 7 is often called a "liquidation". 

Under Chapter 13, you reorganize your debts and have 3-5 years to pay them off.  That's why Chapter 13 is often called a "reorganization".  In order to file Chapter 13 bankruptcy, you must have a reliable source of income to prove that you can repay some of your debts.

Both types of bankruptcies have their own sets of rules and exceptions about the kinds of debts covered, who can file, and the property that you can or cannot keep.  If you meet the eligibility requirements for both, you can choose which type to file.  

How Often Can You File Bankruptcy?

You can only file for Chapter 7 bankruptcy once every eight years.  If you need to file for Chapter 13 bankruptcy after your have obtained a discharge in a previous Chapter 7 bankruptcy then you will need to wait 4 years to obtain a complete discharge.

If you received a discharge in your previous Chapter 13 bankruptcy and you need to file Chapter 7 bankruptcy, then you will need to wait 6 years from the date of filing your Chapter 13 bankruptcy to receive a full discharge. If you have received a discharge in a previous Chapter 13 bankruptcy and need to file Chapter 13 bankruptcy again, then you need to wait at least 2 years from the date of filing of your previous Chapter 13 bankruptcy.

Re-Establishing Your Credit Rating 

Bankruptcy can legally remain on your credit report for 10 years.  However, you can begin to bounce back and rebuild your credit immediately.  It takes about 18-24 months of paying your bills on time to re-establish a good credit rating which would prove that you can manage your finances sensibly.