Financial stress is a problem faced by many Americans. With the growing burdens of student loan payments and credit card debt, any unplanned income interruption can make it feel impossible to meet debt payments, or even pay for rent, groceries, utility bills, and other basic needs.

Families who are feeling the stress of financial issues may be able to use the bankruptcy laws to ease their situation. However, bankruptcy is a serious legal step and must be considered carefully before moving forward to file for this type of financial protection. If you are considering bankruptcy, this information can help you understand the process and make a more informed decision. 

Chapter 7 

There are two types of bankruptcy protection and you will need to determine which one best fits your situation and the goals you hope to achieve by filing for bankruptcy protection. Chapter 7 is the most severe type of bankruptcy, allowing the debtor to completely wipe away all debts. Chapter 7 bankruptcy laws are designed to help consumers start over when they have suffered a complete loss of income or when their debts are so high that repayment seems unlikely, such as when there are large amounts of medical debt. To file for Chapter 7 bankruptcy, debtors must meet very strict eligibility requirements, including a detailed examination of their debts, income, and assets. 

Chapter 13 

A less extreme option is a Chapter 13 bankruptcy filing. Unlike a Chapter 7 bankruptcy, filers of a Chapter 13 agree to set up a court-supervised repayment plan which can allow them to maintain ownership of their home, vehicle, or certain other possessions. The repayment terms are based on the filer's income, debt load, and ability to pay and are usually made on a 3- or 5-year plan. 

Bankruptcy is serious

While it can seem like a no-brainer to file for bankruptcy simply to stop calls from bill collectors and garnishments, those considering this type of legal action must understand that a bankruptcy filing will seriously impact their credit and can even impact their lives in other ways, such as making it difficult to get some types of jobs, rent an apartment or buy a car. 

While the ability to get a mortgage and use some other types of lending does improve after a few years, credit reporting companies may continue to show the bankruptcy filing on credit reports for a decade or more. 

When dealing with financial stress and considering bankruptcy, it is important to discuss your situation with a bankruptcy attorney to make sure that you fully understand the process and potential ramifications of taking this serious legal action.