As a last resort, bankruptcy is a way to eliminate debts or repay them under court protection and supervision, although child support payments, alimony, fines, taxes, and some student loan obligations are typically not eliminated. Bankruptcy will stay on your credit report for up to 10 years, possibly affecting your ability to buy or rent a home, and will likely result in higher interest rates on future loans.
The most common types of bankruptcy are Chapter 7 and Chapter 13. In a Chapter 7 or “straight bankruptcy” scenario, you agree to turn over all your nonexempt assets to a Chapter 7 trustee, who subsequently sells your assets and distributes the money to your creditors. Chapter 13, or “reorganization,” allows you to keep your property, such as a mortgaged house or car, as you pay creditors over a period of three to five years with a single monthly payment.