If you have pared your expenses to the bone, have tried to work things out with your creditors, have spoken to a credit counselor, and still can't resolve your financial problems, then it is probably time to talk with a lawyer about bankruptcy.

Bankruptcy is a remedy of last resort for those who see no other way of getting rid of their debts. In spite of the soothing ads you see on television, it is a long, painful, and expensive legal process. It will have a serious impact on your credit rating for up to ten years.

If you can't find a way to solve your financial problems, however, it gives you a fresh start. Once you have filed the petition, creditors may not take action against you. It stops the letters and phone calls which can make life so miserable.

Two Types of Bankruptcy

The two types of bankruptcy primarily used for individuals are: Chapter 13, Reorganization, and Chapter 7, Liquidation.

Chapter 13 is a court supervised reorganization of debt. It is known as "wage earner" bankruptcy, because it is usually filed by those with regular income. You may be able to keep most, if not all, of your assets. Debts are not wiped out, but reorganized. Some of the debts may be reduced by an arrangement with your creditors. What remains must be paid off in a three-to-five year period. (This means only the amount in arrears, not your mortgage or other long-term debts.) You must start paying your debts off within thirty days of filing the bankruptcy petition.

Chapter 7 is a liquidation of debt. It is filed by about 70 percent of those petitioning for bankruptcy. It wipes out most debts, except those listed in the section titled "Debts That Survive Bankruptcy." For example, if you plan to keep your house and your car, you keep the debt associated with them, too.

All of your assets, except for those exemptions, are sold to pay off the debts to be discharged. The federally exempt items are listed below. Some states have slightly different rules.

Exempt Property

In bankruptcy, you are entitled to keep certain property, called exempt property or exemptions. State laws vary as to what property cannot be taken by creditors to satisfy debts. A majority of states require you to use only the state exemptions. The others allow you to use either the federal or the state exemptions.

Here is a partial list of federal exempt property. See your attorney for the current federal and state exemption amounts.

1. Your interest in real estate up to the exemption amounts.
2. Your interest in a car up to the exemption amounts.
3. A stated amount of personal property such as furniture, clothing, and animals.
4. A stated amount of jewelry.
5. A stated amount of professional books or tools.
6. Health aids prescribed by a doctor for yourself or your dependent.
7. Your right to receive Social Security, unemployment, welfare, veteran's benefit, disability, alimony, support or separate maintenance payment necessary for your support.
8. Also exempt is your right to receive a payment under a stock bonus, pension, profit sharing, annuity or similar plan.

Debts That Survive Bankruptcy

Bankruptcy, even Chapter 7, does not cancel all your debts. The following survive:

1. Alimony and child support.
2. Debts you incurred through fraud. If you lied on a financial statement to a bank, for instance, that debt will not be discharged.
3. Debts you haven't listed in your bankruptcy petition, even if you left them off by accident.
4. Debts from a prior bankruptcy.
5. Fines and penalties.
6. Many types of educational loans.
7. Most taxes.
8. Large charges and debts incurred right before the petition was filed.

How Much Will Bankruptcy Cost?

Chapter 7 attorney fees start at $600 and can go well beyond $1000. Chapter 13 fees are higher, because the restructuring is much more complicated. In addition, there are court fees. If a trustee is appointed, he or she will also charge fees.

The most important thing, as whenever you deal with lawyers and litigation, is to realize that everything will take a lot of time, cost a lot of money, and seem very complicated. If at all possible, avoid legal action. If you can't, try to stay calm and be patient. It won't last forever.