Sometimes life throws us unexpected curveballs, such as job loss or health problems leading to large medical bills.  When you have a situation where you can’t possibly pay back your debt, and efforts to negotiate things down have failed, bankruptcy is an option.

You’ll want to talk to an experienced consumer bankruptcy attorney.

They can help you determine if bankruptcy is the right choice for you.   The attorney can also help you make the right decisions in the process.

A ‘Chapter 7’ bankruptcy is a Liquidation.  In this situation, you basically turn over everything you owe and everything you own to the bankruptcy court.  There is no repayment involved, but you can lose some of your assets to repay your creditors.  A bankruptcy trustee is appointed to your case, and he or she will be responsible for dividing up what you have among your creditors.  The trustee cannot take everything you own; you are usually (but not always) entitled to keep your retirement accounts, a certain amount of home equity if you’re a homeowner, your car and other small things.  Since credit cards and medical bills are ‘unsecured’ debt, these are usually wiped away.

Student loan debt, however, is not automatically wiped away.  Some people have successfully discharged student loan debt through bankruptcy but this usually involves some action on you and your lawyer’s part and that may not be successful.

In order to qualify for a Chapter 7 bankruptcy you must pass a ‘means test’ which involves a review of your income and expenses.  If your income is too high, you may not qualify (which simply means you have the ability to pay back at least some of your debt).  In that case, you can choose from one of the other options.

If your discretionary income is too high to file Chapter 7 (Liquidation), you may have to file Chapter 13.  This type of bankruptcy allows you to work out a plan for repaying your debts over several years. Usually creditors will accept lower amounts so your debts are reduced and creditors are not allowed to contact you during this period.

If you have very large debts, you may have to file Chapter 11 instead of Chapter 13, which is a larger restructuring.

Here you will pay off your debt over a certain period and emerge debt free.  Most consumers do not declare Chapter 11, this is reserved usually for businesses.

Your credit score will be impacted immediately.  Then the bankruptcy will stay on your record for seven years (or 10 years in some states).

A bankruptcy on your record may impact your ability to get employment.  No federal, state or local government agency may take your bankruptcy in consideration when making a decision to hire you.  However there is no similar rule for private employers.  Many private employers do conduct credit checks on job applicants, although they must get your permission to do so.

So, there are some pros and cons here.  Regardless, bankruptcy should be considered only as a last resort.  However, if you find yourself in a bad situation, it can provide a fresh start.