You should try to avoid bankruptcy at all costs. Avoiding Bankruptcy will save you from getting a bad credit rating. It will also keep you from having to get credit counseling. Congress has recently passed a law that they hope will discourage people from filing bankruptcy. This new law requires that your finances and debt be evaluated to determine which type of bankruptcy you can file. This law also requires that you undergo mandatory financial counseling within six month of filing a bankruptcy.

The purpose of bankruptcy is to give a person in debt a "new start" by relieving the debtor of his or her debts. According to United States law, there are two types of bankruptcy: Chapter 7, and Chapter 13.

Bankruptcy in its most common form occurs as Chapter 7. Chapter 7 is the most common bankruptcy and allows a person to keep certain property exempt from being sold to pay off debtors. Chapter 7 says on a person's record for ten years.

The second type of bankruptcy is Chapter 13. Chapter 13 is like a payment plan that works to get you out of debt. However, it stays on your record for 7 years.

Why do people want to avoid bankruptcy? First, there is a social stigma attached to someone who has filed bankruptcy. People may assume you are poor and you do not have good work and moral character. Second, bankruptcy stays around for years. On almost every loan application you will ever fill out (and even some job applications) you will be asked if you have ever filed for bankruptcy. While it may be easy to simply check the box "no" when asked about past bankruptcies, especially if they are over ten years old, you will be committing fraud and you could be prosecuted if the truth was ever discovered.

You should work hard to avoid bankruptcy. However, if there is no recourse and bankruptcy is your only alternative, then make sure you see a professional bankruptcy advisor as soon as possible.
Once your debt is cleared you can work hard to rebuild your credit. While it won't happen over night and it won't be easy, it can be done, but it may be easier to avoid bankruptcy in the first place.