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Bankruptcy is a legal procedure that provides debt relief to consumers who cannot pay their bills. Most consumers who declare bankruptcy do so under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code.

Bankruptcy is a devastating mark on your credit report that can eliminate credit opportunities for up to 10 years, making it difficult to rent a home or apartment and nearly impossible to find a reasonably priced mortgage. It should only be considered as a last resort. Lenders will often work out payment plans for people who continue to show good faith in attempting to pay their debts even though they may be financially embattled. If you are still drowning in debt after exhausting all possibilities of relief, here is what you need to know about the two common types of personal bankruptcy.

Chapter 7 bankruptcy

Also known as "straight bankruptcy," Chapter 7 bankruptcy allows a consumer to keep certain exempt property such as work equipment, and some money, clothing, and home equity. The specific items that are exempt will depend on where you live. The rest of your possessions and assets will be sold under the supervision of a federal court trustee. The money raised from the sale will be parceled out to various creditors. Once bankruptcy is declared, most creditors cannot seek further payment. However, this does not mean the person can skip out on all financial burdens. Court ordered alimony and child support, most taxes and, - under most conditions, - student loans will remain after a Chapter 7 bankruptcy.

Chapter 13 bankruptcy

Also known as the "wage-earner's bankruptcy," Chapter 13 bankruptcy allows the debtor to keep his property and negotiate a three to five year repayment program, which must be approved by the court trustee.

Chapter 13, while still harmful to your credit, is less damaging than a Chapter 7 and remains on your report for 7 years from the date of filing. Chapter 13 is a repayment-plan bankruptcy, in which you agree to repay your debts-or at least a portion thereof-according to terms approved by the court. In addition, your assets are not sold to repay creditors as they would be in Chapter 7.

In April of 2005, the Bankruptcy Prevention and Consumer Protection Act was passed into legislation, making it more difficult for individuals to receive a Chapter 7 discharge. Pre-filing credit counseling and post-filing financial education are now required. Additionally, the Supreme Court held that assets in an individuals IRA account are exempt from withdrawal from the bankruptcy estate.

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