With so many people today finding themselves in financial trouble, the rate of bankruptcy has been on the rise.

The main purpose of bankruptcy is to give honest debtors a fresh start, clearing most debts and discharging debtors from legal obligations and providing the courts with non-exempt assets to be distributed among the creditors.

Types of Bankruptcy

While there are many types of bankruptcy out there, the most commonplace are chapter 7 bankruptcies and chapter 13 bankruptcies of the bankruptcy code.

Chapter 7 is the most common for the individual. It is the complete erasing of qualifying debt. The debtor is then released from all repayment obligations.

But chapter 7 bankruptcies are not to be taken lightly. While giving you an immediate fresh start in repairing your finances, it remains on your credit report for 10 years. You will be looked at as a high credit risk and financially irresponsible.

Chapter 13 is less harmful to your credit. Though there are still marks against you, since you will be working to repay your debts on a payment plan, you do not look like you are financially irresponsible, though you are still considered a slight credit risk. Also, your qualifying assets will not be sold with the chapter 13 bankruptcy like they would in the chapter 7.

In 2005 an act passed legislation that now makes it more difficult for individuals to receive a chapter 7 bankruptcy. There are now terms to be followed such as pre-filing credit counseling and post-filing financial education.

Alternatives to Bankruptcy

When you’re in a financial bind, bankruptcy is not the only way out.

Begin by calling your creditors. Most are willing to work out a reduced payment plan with you if you explain your situation.

Next, speak with a non-profit debt consolidator. Many people who think they are deep in trouble are only borderline, and with some help and creative financial dealings, debts can be paid off without initiating a bankruptcy case.

Before filing bankruptcy, take a good long hard look at your finances. Get organized and begin writing out a budget. Start with your monthly income and deduct your monthly household expenses.

Understand how you are spending your money and seek out where you can make cutbacks. Maybe you could buy your groceries in bulk, or cut back on phone and cable services. Every little bit helps.

Next you will want to take a look at your credit cards. You may be able to take the balance from one with a higher interest to a lower interest one. Then get rid of those high interest credit cards altogether.

Stay away from paying off credit cards with credit cards. Other things you can try are refinancing a car loan or a mortgage. Or perhaps you have some family members or friends who are willing to pitch in to help pay off high rate debts and avoid bankruptcy.

When all else fails, a bankruptcy lawyer should be sought. They are experts in the steps that need to be taken, from filing the paperwork to the court hearing to determine if the bankruptcy filing is legit. False filing for bankruptcy is a crime and punishable in court.

Credit After Bankruptcy

People considering bankruptcy have many questions regarding how future credit will be affected. Common questions debtors have are usually about keeping current credit cards, establishing new credit and buying a home.

If money is owed on a current credit card, then it must be listed in your bankruptcy forms as a debt. These forms are filed under penalty of perjury and if fraud is detected, your bankruptcy case can be discharged. But this doesn’t necessarily mean you will get to keep your card. Your company may cancel your account as a precautionary measure.

Credit is now available to the recently bankrupt, though most will find restrictions such as lower limits and higher interest rates. But it is not necessarily a good idea to start up right away with those credit cards. Frequently, credit cards are what get people into trouble in the first place.

After filing for bankruptcy, many people are afraid they won’t be able to buy a home for 10 years while they have a history of bankruptcy on their credit report. However, rest assured that within 18 to 24 months of a bankruptcy discharge, debtors can qualify for a loan on the same terms as if they had not filed for bankruptcy.