Before deciding whether bankruptcy makes sense, you must understand this simple truth. Bankruptcy is about protecting your property when your debts are overwhelming. If you have no assets to speak of, bankruptcy won't do much for you except stop the bleeding. Still, stopping the bleeding is in most cases a worthwhile goal of bankruptcy.
Which Chapter is Right for You?
Chapter 7 "discharges" your debts. In other words, you walk away. Chapter 13 creates a "plan" by which you pay your creditors, at a greatly reduced rate, over three to five years. Clearly, Chapter 7 is the way to go. But there's a catch.
The Means Test
In 2005, Congress passed a "reform" of bankruptcy law that imposed a "means test" on debtors. If you are seeking relief from personal debt, you have to show that you don't have roughly more than median income, after allowances for certain living expenses. For the self-employed, or those with rental income, though there's a nice out. If 51 percent of your income is "Business" income, you can take a pass on the means test.
There are two credit counseling classes you must take - one prior to filing and one after the petition is granted.
If you qualify for Chapter 7, your attorney will work with you to capture every little bit of financial information. It's all needed to get your Chapter 7 - wages, living expenses, retirement accounts, credit cards, cash on hand, bank account information, and much more.
You get different exemptions, such as the homestead exemption, which may allow you to keep your home. Any assets you have that won't fit under the exemptions though will be sold off by the trustee for the benefits of your creditors.
Meeting of Creditors
After filing, there's a meeting of creditors, where the trustee goes through your petition, asks questions and either approves your bankruptcy or files a motion opposing it If any creditors have a problem with your bankruptcy, they can also appear and ask questions.
If all goes well, soon enough your debts will be discharged and you'll have a new start on life. While a BK remains on your records for 10 years, it does stop the steady flow of late payments and defaults on your credit reports so it's probably an improvement for your credit record.
A word about ethics
People often feel guilty about skipping out on their debts. So remember, bankruptcy is an age old remedy enshrined in the Constitution. Check out http://www.popcrunch.com/bankrupt-65-famous-people-who-lost-it-all/ for a list of famous bankrupts. Bankruptcy is the right to start over, a right that enabled certain entrepreneurs to come up with that brilliant idea.