Types

• The specific pros and cons of a bankruptcy filing will depend on what type of bankruptcy protection is obtained. A Chapter 7 bankruptcy can discharge large amounts of debt, more than other types, but would most likely force a liquidation of most assets. Plus, because of the means test, most filers do not even qualify for Chapter 7. They're forced to file under Chapter 13. This type of bankruptcy will come off the credit record sooner than a Chapter 7, but will only reorganize, rather than discharge, most debt. Chapter 11 is reserved for corporations or individuals with very large, multimillion dollar estates, and, though it operates very much like Chapter 13, it costs significantly more to undertake.
  
  

Benefits

• Once a bankruptcy petition is accepted by the court, an automatic stay goes into effect, which yields the first pro of bankruptcy: the cessation of most credit collection attempts, including those annoyingly constant phone calls. Through Chapter 7 bankruptcy, debtors can get out from under most kinds of debt, including credit card debt, without having to pay. In Chapter 13, the terms of mortgages and other loans can be modified to reflect current property values, and the interest rates can be lowered. At the same time, most states have exemption laws that protect a homestead, vehicle and other essential assets from liquidation, even in a Chapter 7 bankruptcy.
  
  

Effects

• The negative effects of bankruptcy are undeniable. The destruction of an individual's credit for several years is inevitable in a bankruptcy filing. As a result, it will be difficult to obtain credit and loans, such as a home mortgage. And bankruptcy cannot even discharge priority debt like student loans, alimony, taxes and child support. Secured creditors can repossess the property, collateralizing their share of the debt. And a Chapter 13 will not discharge most debts at all--only provide for a chance to restructure the debt and pay over time. Before accepting the cons of bankruptcy then, it is a good idea to attempt negotiation with creditors.
  
  

Time Frame

• Another downside to the bankruptcy process is that it can only be filed for every six years. If an individual gets into financial trouble again before that period expires, then he must file for another bankruptcy chapter, if he is eligible, or find some other recourse. Though an individual's credit score and options will begin to improve almost immediately after her bankruptcy is discharged, the bankruptcy itself stays on the credit history for 10 years if a Chapter 7, and seven years for a Chapter 13.
  
  

Significance

• Bankruptcy proceedings are a matter of public record, so if privacy is an issue, bankruptcy might be an undesirable option. This means the fact of filing bankruptcy will be advertised in newspapers so that creditors can file claims. But the fact that a person filed bankruptcy will also be available to future creditors, employers and landlords so long as it appears on the credit history report. On the other hand, if the debtor is sued by his creditors, this will also be a matter of public record. Bankruptcy damages an individual's credit score, but in many cases the damage has already been done.