Filing for bankruptcy is not a decision that you should take lightly. However, there may be many benefits to doing so, depending on the type of debt that you have, your income, and your current assets. Let’s take a closer look at what it means to file for bankruptcy, the different versions of it, as well as when you know that it’s time to pursue it.

What Does It Mean to Go Bankrupt?

Filing for bankruptcy means that you don’t believe that you have the means to repay your creditors as agreed. Alternatively, it can be seen as an admission that you can’t do so as agreed in a reasonable amount of time.

You have the option to file pro se or with the help of an attorney. Ideally, you’ll do so with an attorney by your side, as the law is complicated and even a minor mistake could derail your case. In a Chapter 13 case, legal fees may be included as part of your repayment plan.

Most types of debts can be included in a bankruptcy filing, whether you opt for a liquidation or reorganization. Notable debts that are excluded include back child support, most types of taxes and most student loan payments.

What Types of Bankruptcies Are Available?

You’ll likely file for either a Chapter 7 liquidation bankruptcy or a Chapter 13 reorganization bankruptcy. Depending on your income and assets, you may be required to file for a Chapter 11 reorganization. This would likely be your best or only option if your current debt balances exceed the limits for a Chapter 13 case.

In a Chapter 7 case, you agree to forfeit all nonexempt assets to the trustee so that they can be liquidated and the proceeds given to creditors. In many cases, the exemption amounts are sufficient to protect assets like a car, computer or tools used for work. They may also be sufficient to protect funds in a bank or brokerage account.

A Chapter 13 case allows you to create a payment plan to protect your assets. The plan lasts for either three or five years, depending on your income, and if a debt balance remains after the payment period ends, it may be discharged.

When Should You File for Bankruptcy?

If you can’t pay your debts in five years or less, it’s generally best to file for bankruptcy protection. You may also want to file if you can’t stay current with your loans as it could result in a lawsuit, foreclosure or other result that may be postponed or avoided altogether by the automatic stay in your case. Filing for bankruptcy might also be your best option if you have few assets that can be taken by a trustee.

Although bankruptcy is a serious step to consider taking, you can recover from it over time. As long as you avoid the mistakes that got you into financial trouble to begin with, it can serve as a way to help you reset and obtain a stronger financial future.