According to the credit counseling and the National Foundation for Consumer Credit, some experts recommend that if you cannot pay back outstanding consumer debt in three to five years, bankruptcy may be the best option for you (of course, that doesn't include long-term loans like mortgages, which are normally repaid in 20-30 years). But bankruptcy isn't an "easy" way out--depending on which kind you file, it can make it difficult for you to obtain new credit for up to 10 years, a consequence that must be weighed against the benefit of relief from your debts.

         Before you decide whether or not bankruptcy is right for you, you may want to speak with a credit counselor or a professional law firm about your situation and what other options there might be for you. Please keep in mind that most credit counseling agencies are funded by credit card issuers and other lenders, so their leaning is typically away from bankruptcy, even if it may really be the best option for you. You may want to consult with at least 3 to 4 agencies or law firms before make a decision for yourself.

        For credit counseling, you may want to enlist the aid of a local branch of the nonprofit National Foundation for Consumer Credit (NFCC). The NFCC offers free or low-cost debt counseling, financial education, budgeting assistance, and other financial services for consumers. To locate an office nearby, you can check the NFCC web site at www.nfcc.org or call toll-free 1-800-388-2227 for 24-hour automated office listings.

         The NFCC also offers Debt Management Plans that can sometimes lower your payments, fines, or interest. A Debt Management Plan offers a systematic way to pay down outstanding debt. You would deposit your debt repayment funds with the agency each month and the NFCC would disperse the funds to your creditors according to repayment plans it negotiated with them. The NFCC can often negotiate reduced or waived finance charges and fewer collection calls, so you might be able to bring your debt under control more quickly.

Different Types of Bankruptcy

         Bankruptcy is a legal procedure that provides debt relief to consumers who cannot pay their bills. The decision to file for bankruptcy is a serious step, and is usually taken when other efforts to correct financial difficulties have failed. It is one of the most severe notations you can have on your credit report. Most consumers who declare bankruptcy do so under Chapter 13 or Chapter 7 of the U.S. Bankruptcy Code.

        Chapter 7 is a complete relief bankruptcy, meaning that the debtor is released from all repayment responsibility for the accounts included in the bankruptcy. That complete relief comes at a high price, however: Chapter 7 bankruptcy remains on a credit report for 10 years from the date of filing. That's three more years than most negative information, in addition to being one of the worst marks on your credit in the eyes of potential creditors. A Chapter 7 bankruptcy can be the only way out for people who are deeply in debt, but future credit grantors may interpret it as a sign of both financial irresponsibility and a very high credit risk. If you bailed out once, they may reason, what's to stop you from doing so again?

        Chapter 13, while still harmful to your credit, is less damaging than a Chapter 7 and remains on your report for fewer years. 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. A Chapter 13 bankruptcy remains on a credit report for seven years from the filing date.

Note: This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Sources: For credit counseling, the nonprofit National Foundation for Consumer Credit (NFCC). The NFCC offers free or low-cost debt counseling, financial education, budgeting assistance, and other financial services for consumers. To locate an office nearby, you can check the NFCC web site at www.nfcc.org or call toll-free 1-800-388-2227 for 24-hour automated office listings.