In the current economic situation, many people are facing difficult choices about how to get out from under mounting debt. One of these is declaring bankruptcy.

However, unlike when General Motors declares bankruptcy, the private citizen is not going to be bailed out by the government, so it is important to understand the issue thoroughly in order to find a solution to your financial crisis.

Bankruptcy may be a viable option for some borrowers who are in severe debt but in a lot of cases, it is possible to avoid bankruptcy by getting good debt counseling advice from a financial advisor.

What is Bankruptcy?

First of all, as intimidating as it may sound, bankruptcy is actually a form of a plan. It is a strategy for people or businesses that have accumulated more debts than they can repay. They can either agree on an arrangement to repay the money or to cancel their debts completely.

There are two types of personal bankruptcy:

1. Chapter 7 is the most drastic form of bankruptcy. This is a liquidation proceeding in which the debtor’s assets are sold and the proceeds are distributed to the person’s creditors.
2. Under Chapter 13 bankruptcy, the debtor undertakes to repay some or all of the money according to a payment schedule.

The advantage of Chapter 13 is that the debtor is given a fresh start, while being able to keep his or her car and home, and avoiding lawsuits.

Avoiding Bankruptcy

Perhaps the first step in avoiding having to choose which type of bankruptcy to file is to arrange a debt consolidation loan under a Debt Management Plan (DMP).

This would let you reorganize your finances while retaining your credit rating.

Additionally, your creditors may be willing to settle for less than you owe due to your regular monthly payments, which are usually completed within five years.

If your financial crisis is only of a temporary nature, you can avoid bankruptcy by getting a short term emergency loan to cover you until your income is able to sustain your loan payment obligations.

• Personal Finance Articles
• Financial Websites