If you have suffered a significant hardship and feel there is no way to pay any of your debt, and neither debt management or debt settlement can be a solution, bankruptcy could be your final option if you qualify. Bankruptcy became more difficult to qualify for in April of 2005 when George W. Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act. See the White House website for President Bush's remarks about this law.

The Bankruptcy Abuse Prevention and Consumer Protection Act, an amendment to U.S. bankruptcy laws, went into effect in October 2005. Also known as the Bankruptcy Reform Act, it makes the following changes to bankruptcy laws:

Filing a Chapter 7 Bankruptcy

If you have insufficient income to pay your debts and have no prospect of creating additional income, Chapter 7 may help you. A Chapter 7 bankruptcy gives you a clean slate. This means that many of your unsecured debts are discharged, and you don't have to repay them.

But the Bankruptcy Reform Act has made it more difficult to file a Chapter 7 bankruptcy. First, you must attend a credit counseling session from a government-approved credit counseling agency within 6 months before filing your bankruptcy petition..

Those who wish to file Chapter 7 must pass a means test to prove they lack the financial resources to pay back their debts. A debtor's income for the past six months is compared with median income for the state where the debtor resides. If the debtor's income is greater than the state median, and the disposable income is sufficient to pay at least $10,000 over the next five years, filing Chapter 7 is not an option. Instead, the debtor can petition for Chapter 13 reorganization of debt. For more information about calculating income for the means test, see the U.S. Trustee Program Means Testing webpage, and Form B22a - Chapter 7 Statement of Current Monthly Income and Means-Test Calculation.

If you file Chapter 7, you maintain responsibility for your secured debt (such as a home mortgage or car loan) if it is considered exempt. The laws determining what property is exempt vary according to your state of residence, so check with your bankruptcy attorney. A court-appointed trustee generally sells non-exempt property, such as real estate or personal property of value, and the proceeds are used to pay your creditors. For more information about Chapter 7 bankruptcy, see the U.S. Courts Bankruptcy Basics article Chapter 7 - Liquidation Under the Bankruptcy Code.

You should keep in mind that not all unsecured debt is dischargeable. For example, Chapter 7 does not eliminate: Government student loans, Taxes, Fraudulently created debts, Alimony, or Child support. You will continue to be responsible for these debts, even after you file a Chapter 7 bankruptcy.

Filing a Chapter 13 Bankruptcy

A Chapter 13 bankruptcy, also called the wage-earner plan, gives you some breathing room with your unsecured debt. When you file Chapter 13, the courts appoint a trustee who is responsible for summarizing all of your debts into a payment plan you can afford. The trustee allocates your monthly income to your creditors. This type of bankruptcy relief is available to you if you have: A regular source of income and less than $307,675 in unsecured debt (credit card debt) and less than $922,975 in secured debt (home and auto loans).

In Chapter 13 your debts are not discharged and you keep your property. Generally, the repayment schedule lasts from three to five years. After completing the court-ordered repayment plan, most remaining debt is discharged. One of the changes brought about by the 2005 bankruptcy reform legislation is that certain debts can no longer be discharged: Educational loans, child support or alimony, debts for luxury goods of $500 or more that were incurred within 3 months before filing for bankruptcy, cash advances of $750 or more obtained within 70 days of filing, drunk driving damages; personal injury lawsuit damages; fines related to criminal prosecution, income tax debt arising from fraudulently filed tax returns or from tax returns that were not filed or filed late, trust fund tax debt.

PROS	CONS
Elimination of most or all of your debt.	Bankruptcy can stay on your credit report for up to 10 years.
	You may have difficulty re-establishing credit.
	It may be more difficult for you to get some types of jobs.