There are two different types of bankruptcy that affect the average person. It is important to first note that bankruptcy is not a good option in most situations and should not be used unless it is necessary. It is costly and can damage credit. It may be slightly better than having a property foreclosed on, but if there are other options available, these should be considered first.

The first type of bankruptcy is a Chapter 7 bankruptcy. The advantage of this type of bankruptcy is that all debt will be wiped out. However, under new bankruptcy laws, not everyone is eligible to file for a Chapter 7. Income must be under a certain level for Chapter 7 bankruptcy to be an option. Another problem for people facing potential foreclosure is that the person filing bankruptcy must take a Credit Counseling course within six months before filing. For people in a pinch and facing foreclosure with very little time, this may be too much to accomplish in the time given. The way a Chapter 7 works is that the debtor turns over most of his/her property (a home would generally be an exception to this) to a trustee who then sells it and pays creditors with it.

Chapter 13 bankruptcy is the other way to file and is becoming more common with new bankruptcy laws. Under Chapter 13 bankruptcy, the debt is not wiped out, but the person filing bankruptcy must make regular payments on a payment plan that is generally three to five years in length at which point the debt will be released. The law requires that anyone filing Chapter 13 must have a regular source of income. With Chapter 13, a property owner has a much better chance of being able to keep the property, so this type of bankruptcy is typically what would be recommended for someone facing foreclosure.

When filing the bankruptcy, a stay is put on all assets which means you cannot buy or sell anything. This does temporarily protect the home from foreclosure, but creditors can also ask that the stay be removed and the foreclosure process will begin where it left off prior to filing the bankruptcy if the creditor is successful in having the stay on the property removed. What's more, if Chapter 13 bankruptcy was filed and payments are not kept current, the foreclosure can still take place.

Some people believe that filing bankruptcy will allow them to walk away clear and free with few repercussions, and some are too quick to advise a person to file. But if the individual filing bankruptcy does not realize that all responsibility is not gone and that he/she will have to be very careful, property could still be lost in foreclosure. A persons credit will take a hard hit and the bankruptcy can make taking out future loans or mortgages a greater challenge. Considering these points, avoiding bankruptcy is almost as important as avoiding the foreclosure itself and is only an option to consider when other measures have failed.