The issue of bankruptcy is rather complex, and may not be adequately answered here. However, here is a simple overview:

As of 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) determined that, before a debtor can declare bankruptcy, he must take a means test to determine whether he has the "means" to pay debts.

Chapter 7 bankruptcy, also called a liquidation bankruptcy, only allows the debtor to discharge unsecured debt (such as credit-card debt), with certain exceptions, which can include alimony and back child support, and some tax debts. The debtor will still be liable for the secured debt, such as mortgages and car notes. Liquidation means that the debtor's assets are converted to cash to pay the indebtedness. However, the court recognizes that the debtor needs to be able to function, and allows him to keep certain property, such as clothing and furniture, and insurance policies and IRAs, for instance.

Chapter 13, also called a reorganization, requires that the debtor create a repayment plan. However, rather than having to liquidate assets, the debtor pays debt via disposable income. This can involve regular garnishment of wages and/or bank accounts. A repayment plan typically lasts between three and five years.

One important note about secured debt vs. unsecured debt: Consumers often make the mistake of rolling unsecured debt into secured debt (i.e. seeking unsecured-loan consolidations through home-equity loans). This makes the debtors vulnerable to repossession if they're unable to repay the equity.

Chapter 7 bankruptcy, sometimes call a straight bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor has no assets that he would lose so Chapter 7 will give that person a relatively quick "fresh start".

Chapter 13 Bankruptcy is also known as a reorganization bankruptcy. Chapter13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

Filing Chapter 7 means that you walk completely away from your debt. It will stay on your credit report for a longer period of time. Chapter 13 is known as Wage Earner. The court collects a certain amount of money from your employer each month and they actually pay your bills from that money. They will pay the most important ones first, especially if they are collateralized. It could take several years for them to pay out. They allow you only enough money to live on. Some people make the mistake of going right back in debt and end up in the same old fox hole.