(TheDailyCurrents.com) – Filing for bankruptcy is the last resort for many financially strapped Americans. It can seem like the answer to all your problems if you’re having serious money problems, but you should know all the pros and cons of such a move before you make a final decision.

For starters, a bankruptcy will not make some debts go away. If you owe back child support, for instance, you owe your former spouse and child that money, regardless of your financial status. Even if you’re in prison, you’re still obligated to pick up payments when you’re released. Back taxes you owe either the federal or state government also stay with you pretty much forever, as does student loan debt.

If you think bankruptcy will help, consult with a credit counselor first. This is a free service that can help you figure out your best course of action, and one that anyone actually filing for bankruptcy protection must undergo as part of the process. Your credit counselor agrees that bankruptcy is your best way out, your next step is to meet with a bankruptcy attorney who can advise you on the right type of bankruptcy for your case,  and be your advocate throughout the process.

There are two types of personal bankruptcy:

Chapter 7 is a liquidation procedure, where the court directs you to sell all of your assets to pay off your creditors. There are some exceptions to liquidation that we will cover later.

Chapter 13 is a reorganization process. Your attorney will restructure your debt by working out payment plans with your creditors  that you can afford, and you pay the courts a lump sum every month, instead of paying individual creditors.

Benefits of Bankruptcy

• No more contact from creditors. A bankruptcy filing creates an automatic “stay” on all your debts and creditors can’t contact you to collect on the debt or threaten repossession or eviction while the court action is pending. After the debt is discharged, creditors are still forbidden to try to collect on it.
• Protects wages from garnishment.  Any money you earn after you enter bankruptcy is exempt from the bankruptcy estate, meaning that those wages can’t be garnished to pay off any remaining discharged debt.
• Psychological relief.  Making the decision to file and the relief people feel when the situation is in hand is a huge benefit for your emotional health. Financial stress is real, and bankruptcy gives you breathing room from your creditors and a solid plan to move forward.
• Some assets are protected.  Your home, cars, clothes, and other personal assets are exempt from liquidation. Retirement accounts are also safe if you declare bankruptcy.

So What are the Downsides to Bankruptcy?

The biggest downside to declaring bankruptcy is that the filing stays on your credit report for ten years. Some anti-bankruptcy proponents say that it will destroy your credit, but for most people that happens long before the actual filing. You can start rebuilding your credit right away, by keeping up with payments on your home and cars, and getting a secured credit card.

Another con to bankruptcy is that attorneys aren’t cheap. You’ll pay the legal fees and court costs out of pocket, and that expense will run in the thousands.

You’ll also have to give up your pretties—if you file Chapter 7, luxury items  over a certain value may need to be sold to pay your debts, so say goodbye to expensive watches, boats, art, and other “fine” assets.

Consider the Alternatives

You can always try to negotiate with your creditors to work out a payment plan before you go the drastic route to bankruptcy.  A debt consolidation loan could help you get out from under crushing credit card debt with a lower interest rate. The sooner you address your financial stress, the better your odds to avoid filing for bankruptcy.

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