Bankruptcy is one way people seek to eliminate debt. Unfortunately, Chapter 7 and 13 bankruptcies often lack the level of debt relief consumers anticipate receiving with a bankruptcy. Before you decide bankruptcy is the best choice, you should carefully understand the risks and rewards of financial insolvency.

When most people think of bankruptcy, they think of a "clean-slate" from debt. Sadly, that is rarely the case. A Chapter 7 filing is the form of bankruptcy that dissolves most, if not all, unsecured debt. Taxes and student loans are usually not removed with a Chapter 7 but credit card debt typically is abolished. The bad news is that in 2005 Congress changed the bankruptcy code making it more difficult to qualify for a Chapter 7 filing. The new code requires a means test that has made qualifying more difficult. The new code, also, increased filing fees, court fees and made the process even more arduous.

The more common form of bankruptcy for individuals is a Chapter 13. During the course of a Chapter 13, you now have to undergo financial counseling before you can officially declare bankruptcy. This extra step is intended to weed out consumers who could survive without insolvency and give them some financial advice.

If you do file for a Chapter 13, you should realize the court will go through your financial history and recommend a repayment schedule, which is three to five years in duration. Therefore, you will probably still repay a large portion of your debt. Chapter 13 does not require an individual to liquidate their home, but does garnish the debtor’s wages resulting in all disposable income, as determined by the court, to be paid to creditors.

Another requirement for Chapter 13 is a steady income to repay your creditors. If you lose your job, even due to a medical condition, your bankruptcy plan may become compromised. If you fail to successfully complete the repayment plan during bankruptcy, assets such as your home, automobiles, or boats can be liquidated by a creditor or bankruptcy trustee to pay off your debt. In the case you don’t have any savings plan to fall back on, you may be more financially stressed than before the bankruptcy.

A creditor may also reaffirm a debt after the court discharges either a Chapter 7 or 13 bankruptcy. Oftentimes secured debt is reaffirmed. A debtor may want to reaffirm their debt after the bankruptcy discharge because they may have had a co-signer on a loan or to keep property from being liquidated by their creditor or the bankruptcy trustee.

Bankruptcy is a viable option for debt relief for some people. Yet, it is extremely important to understand the process and the effects of this option. Chapter 7 stays on your credit report for approximately 10 years and Chapter 13 remains for at least seven years. While bankruptcy is on your credit report, you will most likely be turned down for loans and have high credit card interest rates. Though you probably shouldn't try to accumulate more debt anyway, you drastically reduce your options for large-purchase loans.