Should credit counseling fail, at some point, the debtor may attempt to obtain relief from creditors through filing personal bankruptcy petition. Personal bankruptcy is an official declaration that an individual is unable to repay the amount owed. If the court approves the bankruptcy petition, the assets and earnings of the debtor will be administered in the creditor’s best interest, and certain financial obligations may be discharged. Bankruptcy petitions must be filed in U.S. federal court.

The debtor must pay a filing fee and have legal presentation. There are several forms of bankruptcy. The two most popular forms are Chapter 13 and Chapter 7, named after the actual sections of the U.S. bankruptcy code in which the provisions of each appear. Chapter 13 bankruptcy is a legal remedy through which the debts of the individual are restructured according to a repayment plan. Chapter 13 is designed for debtors who have a regular earnings stream and when there is a reasonable chance that debtor may be able to repay his or her obligations if given time and protection from creditors. Chapter 13 bankruptcy is also known as the Wage Earner Plan and Regular Income Plan.

Under Chapter 13, the debtor prepares a list of financial obligations and a plan for repayment part or all of these obligations over the next three to five years. The court and a majority of creditors must approve the plan. If it is approved, the debtor makes regular payments to the court or a court-appointed trustee, who in turn makes payments to the creditors. During this period of structured payments, interest and late payments fees are waived.

The debtor is prevented from taking on additional debt without the permission of the trustee. Should the debtor make the scheduled payments, any remaining obligations are discharged.

Note that the debtor retains the use of his or her assets, and no assets are liquidated. The upper limit for total debt under Chapter 13 bankruptcy was increased from $450,000 to $1 million under the Bankruptcy Reform Act of 1994. The $1 million limit includes up to $750,000 in secured debts and $250,000 in unsecured debt. The majority of individuals filing for bankruptcy protection elect the more drastic declaration, Chapter 7 (or “straight bankruptcy”).

A chapter 7 bankruptcy is a legal remedy through which a debtor’s assets are immediately liquidated, and the debtor is relieved of further obligations to his or her creditors.