In these tough economic times Americans are taking on more debt: job losses, soaring gasoline and food prices and slumping home values strain many people's budgets. If you are facing serious financial problems, bankruptcy may offer you a powerful remedy. You will receive a discharge - a court order that says you don't have to pay off certain debts. However, it can be difficult to admit that you need help getting out of a nerve-racking debt. If you regard bankruptcy as a scary proposition, consider the following FAQ. It will give you a clearer understanding of bankruptcy to make a well-considered decision.

Bankruptcy is a federal court process designed to help people eliminate or repay their debts under the protection of the bankruptcy court. However, the information about bankruptcy will stay on your credit report for 10 years. It can seriously damage your credit score. Potential lenders will consider you as a high risk, so it can be difficult to get approved for a credit card or a loan with low interest rates.

Federal law contains different Chapters governing specific types of bankruptcy proceedings. A consumer, or non-business debtor, can go through bankruptcy under either Chapter 7 or Chapter 13.

What is the difference between Chapter 7 and Chapter 13?

In Chapter 7 bankruptcy, you ask the court to discharge the debts you have. In exchange the bankruptcy trustee can sell some of your property to pay down your debts. You have the right to keep any property that is classified as "exempt" under the state or federal laws (for example your clothes, car, and furniture). If you don't own much, all of your property can be considered as exempt.

In Chapter 13 bankruptcy, also known as a "wage earner" bankruptcy, you need to file a repayment plan to cover your financial obligations. Some debts have to be paid in full; others may be eliminated only partially or not at all - it depends on how much you earn and how much property you own. Any unsecured debts that remain once your repayment plan is complete will be discharged.

Can I choose between Chapter 7 and Chapter 13?

Most people prefer to go through Chapter 7. It's fast and easy to file, and you don't have to pay back your debts. However, you won't be allowed to use Chapter 7 if your income is sufficient to pay some or all of your debts in the five year time frame provided by Chapter 13.

In order to go through Chapter 13, you need to show the bankruptcy court that you have enough income to meet your repayment obligations. Your plan must repay certain debts in full, or the judge will not approve it.

If you have secured debts of more than $922,975 and unsecured debts of more than $307,675, then you can't use Chapter 13.

If you meet the eligibility requirements for both Chapters, then you can select which type of bankruptcy will be the best solution for your financial crisis.

Will all my debts be discharged in bankruptcy?

It depends on the type of debts you have. The court can eliminate your unsecured loans, credit card debts and medical bills. Student loans will not be discharged unless you can show that repaying the debt would be an undue burden.

If you have a secured debt such as a mortgage or a car loan, the bankruptcy can discharge the debt, but it does not prevent the creditor from repossessing your property.

There are several types of debts that cannot be wiped out in bankruptcy. They include child support, spousal support obligations, tax debts, fines and penalties imposed for violating the law, debts for personal injury or death caused by your intoxicated driving and debts that you forget to list in your claim.