When you play Monopoly and declare bankruptcy, it's a scary turn of events. When you're in your own life and realize you don't have any other way to get out of debt, bankruptcy can seem terrifying. Even so, bankruptcy is a good financial tool to help out everyday people when things get out of control.

You may think, everybody has debt, everybody has too many credit cards-how can you know how close you are to the bankruptcy borderline? Here are a few questions to help you assess your financial danger zone:

• When your credit card bill comes, do you make only minimum payments?
• Do bill collectors call you?
• When you think of getting a handle on your finances, do you feel terrified or out of control?
• Have you used your credit cards to buy daily necessities?
• Have you considered consolidating your debt?
• Do you know the exact figure of what you owe?

Time to Take Stock

If you answered yes to more than one of the above questions, you might want to examine your personal financial situation a little more closely. Very simply, bankruptcy applies when you cannot afford to pay off the money you owe.

Figure out where you stand in relation to your finances. Take an inventory of all of your liquid assets, and don't forget to go beyond the simple checking and savings accounts. Consider any retirement funds, stocks and bonds, real estate holdings, cars and other vehicles, savings accounts for college, and any other financial accounts outside of your bank. Estimate the value of each asset and add them all together. This will count as your plus column.

Now, you want to figure out what you owe. Collect and total your bills and statements from credit card companies. If the total value of all assets is less than your total amount of debt, declaring bankruptcy may be a good way out of a difficult financial situation. However, make sure that you are taking declaring bankruptcy seriously. After all, bankruptcy is not simple cure-all for debt that is spinning out of control.

How Do I Declare Bankruptcy?

Declaring bankruptcy is done in one of two ways. The first, most typical way is to file for bankruptcy on your own, voluntarily. The second way involves a court - creditors are ordered by a judge to consider a person bankrupt.

Bankruptcy is filed in several ways and each one has its own positives and negatives. It may be a good idea for you to consult an attorney before actually beginning the process in order to figure out the best fit for your personal circumstances.

Chapter 7 Bankruptcy

People file Chapter 7 bankruptcy for a number of reasons. Some of the most common ones are unemployment, overwhelming medical expenses, credit that has been egregiously overextended, and marital problems. Chapter 7 is often called "straight bankruptcy." It liquidates your assets in order to cover as much of your debt as possible. The cash recovered from your assets is divided up between your creditors, like banks and credit card companies.

Within four months of filing for bankruptcy, you will receive a notice of discharge and your creditors will forgive your debt. Your credit report will have a record of your bankruptcy for a period of ten years, although that does not necessarily mean you face financial disaster. Many people who have filed Chapter 7 were able to purchase homes, even with a recent bankruptcy on their credit record. Very frequently, Chapter 7 offers a quick, fresh start.

Keep in mind, Chapter 7 bankruptcies aren't right for everybody. Almost all of your assets will be sold off to repay creditors. This includes a business, home, or any other personal assets which he or she might to keep.

Chapter 13 Bankruptcy

For people who want to declare bankruptcy but have property, like real estate holdings or a business that they want to keep, Chapter 13 bankruptcy may be the better option.

A Chapter 13 bankruptcy is called a reorganization bankruptcy. It lets people pay back what they owe over a three to five-year period. For individuals with consistent, easily predicted annual income, Chapter 13 offers a grace period. Any debt which remains at the end of that grace period is wiped out.

Once a person's bankruptcy is approved by the court, creditors are ordered to stop contacting the debtor. Bankrupt individuals may continue to work and slowly pay off their debts over three to five year period while maintaining ownership over their property.

Scary, But Sometimes Essential

Figuring out that your debt is overwhelming you and that you can't get yourself out of it can be a hard realization. But that is the exact reason for laws that protect creditors and debtors alike. If your debt has spun out of control, it might be time for you to face the financial music instead of trying to ignore the phone or pile of bills that won't disappear.

With a good attorney and accurate information, filing for bankruptcy just might give you the right financial foundation to get a fresh start. In other words, calling it quits may be just the exact beginning you need.

LegalZoom is not a lawfirm and can only provide self-help services at your specific direction. Information contained above is subject to change and is not applicable to every state. Visit LegalZoom.com for specific state-by state-documents.

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