Bankruptcy: Your last resort

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NEW YORK (CNNMoney.com) -- Foreclosures are at an all time high; consumer debt is over $2.5 trillion dollars and the rise in consumer bankruptcies are a disturbing new trend. If you're thinking about filing, Personal Finance Editor Gerri Willis has some tips on what you need to know.

The numbers are sobering, especially considering that in 2005, bankruptcy laws were changed to make it hard to get your debts discharged through a Chapter 7 bankruptcy. The rise in the bankruptcy rate just shows you how much trouble American families are in.

For the month of July, consumer bankruptcy filing increased almost 50% over the previous year. Consider this: Last year there were 800,000 bankruptcy filings. So far for 2008, the prediction is that we'll see about 1.2 million filings, according to Jack Williams of the American Bankruptcy Institute.

A black mark on your credit report is one consequence. This negative mark could stay on your credit score for seven to ten years. And that will lower your credit score, making it harder to secure a loan, apply for a job or get insurance.

If you have a government job or a job that requires a high level of security clearance, your position may be in jeopardy. You may not be granted certain professional licenses or certifications since your financial data will be a factor in that decision.

If you have a mortgage or a car loan you will still be responsible for making payments to your creditors even in a bankruptcy, otherwise those assets can be taken away. Most states exempt a certain amount of property that you can hold onto. For example, if your home is exempt up to $200,000 but you owe $425,000, you may have to sell your house and keep only that $200,000.

Of course, the law varies by state. In some places, like Texas and Florida your entire property is exempt from creditors if you declare bankruptcy. If you have a bank account, stocks or bonds, CDs or mutual funds, all that can be taken away. However, IRAs, most 401ks, pensions or 529 plans are generally safe from creditors.

Bottom line here: Bankruptcies should be a last resort. So, make sure you've gone to a credit counselor and explored every other alternative before settling on bankruptcy.

If these following scenarios are very familiar to you, it could be a sign that you should consider filing: if most of your debt is from credit cards or medical bills; if your total debt is more than you could pay over 5 years - excluding your mortgage and car loan; you have lawsuits against you or debt collectors are calling you all the time.

Keep in mind that there are some debts that you cannot wipe out, including student loans, back taxes, or child support.

It will definitely delay the foreclosure. Creditors can't take action until there has been a decision by the bankruptcy court.

If you file for a Chapter 7 bankruptcy, where your debts are discharged off the bat, you won't be able to save your home. Chapter 13 allows you to catch up on overdue payments you made before you filed, while keeping up with current payments.