Debt relief can take many forms, including debt settlement, debt consolidation and bankruptcy. Each has its pros and cons, and it's important to understand your options carefully.

Bankruptcy is an option for individuals who can no longer afford to pay their debts. It can be an effective way to get a fresh start, but it will have a significant impact on your credit score.

Chapter 7

Creditors know that bankruptcy eliminates their ability to collect debt, so they're often willing to settle for less than what's owed. This is especially true for unsecured debts, such as credit card balances and personal loans. But bankruptcy does impact credit for 7-10 years, so it's not a suitable option for everyone.

To file for Chapter 7, a person must undergo credit counseling from an approved agency. Then he or she must pass the "means test," which is determined by adding up a variety of expenses and debt-payment amounts. This is done to ensure that filing for Chapter 7 would not be presumptively abusive.

In addition, a person who files for Chapter 7 must be able to protect certain assets from liquidation such as his or her primary residence, one car and a limited amount of other property. Luxury possessions such as second homes and multiple cars are

not protected in Chapter 7. The trustee liquidates nonexempt assets to pay creditors. Unsecured priority debts are paid first, followed by secured debt and nonpriority unsecured debt that can be paid with funds remaining from the liquidation.

Chapter 13

If you earn above-average income, are willing to set up a repayment plan with the court and want to keep valuable property like your home or car, Chapter 13 may help. It works similar to debt settlement, with the monthly payments going directly to a trustee who pays your creditors.

A Chapter 13 bankruptcy gives people with their backs against the wall some breathing room. It stops collections, including foreclosures and repossessions and allows a debtor to repay some nonpriority debt over three to five years. It also has a special provision that protects co-signers on consumer debt. It does not stop a creditor from seeking a hardship discharge, however.

Chapter 11

Many small businesses use Chapter 11 bankruptcy to get debt relief, especially when faced with a temporary downturn or other financial challenge. The bankruptcy process stops collection by creditors, allowing the company to rethink its finances and come up with a plan to pay off debts over time.

When a business files Chapter 11, it becomes the debtor in possession, keeping ownership of its assets. The court requires that the debtor keep operating its normal operations during and after the bankruptcy, except for acts that are "outside of the ordinary course of business." This includes selling certain property, satisfying liens and other transactions that require advance approval by the court.

The "best interests of creditors" test is a major requirement in Chapter 11. A creditor's committee may play an important role in the case. This group, appointed by the court, ordinarily consists of the seven largest unsecured creditors in the case. The committee consults with the debtor in possession of administration of the case and participates in formulating a plan.

Other Options

There are a variety of debt relief options. Credit counseling, debt management plans and debt settlement all fall under the debt relief umbrella, helping you find a manageable way to repay your debts. These options may offer better rates, lower fees or even debt forgiveness. Debt settlement involves working with a company that will negotiate with your creditors for you to pay less than the total amount owed.

If you are struggling to meet your monthly debt payment minimums and feel like there is no end in sight, it may be time to explore your debt relief options. These options can include wiping out your debt through bankruptcy or getting changes in the terms of your debt that make it easier to manage and pay down. But each option has a different effect on your finances and credit score. You will need to carefully weigh the pros and cons of each before you choose one. The best bet is to seek a Harrisburg bankruptcy lawyer for all help regarding your financial situation and any bankruptcy advice.