Whether you're up to your neck in loans, out of work or stretching one small paycheck to meet ever-growing obligations, nearly everyone occasionally flirts with the idea of ditching their debt.

At a glance

Chapter 7 Chapter 13 • Known as liquidation • Takes four to six months from the date of filing to the final discharge • Can file only once in six years • Allows filers to give up assets in exchange for discharge of their debts • Option for people who have few or no assets, often little or no income, and a lot of debt. • Stays on credit score for 10 years • Known as debt adjustment • Allows individuals to temporarily halt foreclosures and collection actions while they draft and execute a plan to repay some or all of the debts over a three- to five-year period. • The amount that has to be paid on debt will depend not on how much you owe but on how much you have -- your regular income • Differentiates between three types of debt: priority debts, secured debts, unsecured debts • Lets you reschedule and extend secured debts over the life of your Chapter 13 plan. • Debt limits apply • Stays on credit score for seven years

While the reasons to file for bankruptcy vary, statistically speaking, 33 percent of debtors cite job or income loss as one of the reasons or even the number one reason they filed, says John Ulzheimer, vice president of the After Bankruptcy Foundation, a nonprofit organization that helps people recover from bankruptcy. Another 37 percent cite medical and job-related reasons and 24 percent cite medical-only reasons for filing.

But the reality of bankruptcy is that it's a complicated legal procedure that will trash your credit rating.

Reforms in 2005
And, bankruptcy laws are now even more complicated thanks to new reforms that went into effect Oct. 17, 2005. The changes in the laws make it harder to qualify for bankruptcy and even exclude some people from filing Chapter 7 altogether.

The new reforms require that a person filing for bankruptcy must get credit counseling from a government-approved credit counseling agency. The debtor must go to counseling within 180 days before filing for bankruptcy. There are some exceptions, such as the lack of qualified agencies to provide counseling and certain emergencies.

What's more, before any debt can be discharged under Chapter 13, debtors have to take a government-approved financial management education program. If debtors fail to complete the course, debts will not be discharged.

After these programs are completed, a person may file for bankruptcy. Most people opt for either Chapter 7 or Chapter 13. While rules vary widely from state to state, here's a general rundown on each, along with the new stipulations:

Chapter 7
Commonly known as liquidation, Chapter 7 usually takes four to six months from the date of filing to the final discharge. You can file only once in six years. This form of bankruptcy basically allows filers to give up assets in exchange for discharge of their debts. This is frequently the option for people who have few or no assets, often little or no income, and a lot of debt.

"You would use a Chapter 7 if you don't have assets of value that the trustee would try to sell," says David Greer, a partner with Williams Mullen in the real estate section, whose practice covers bankruptcy.

New rules affect eligibility
Some new bankruptcy rules will make it harder to qualify for Chapter 7:

Debtors must pass the "means test," meaning when they file, their income must be less than the median income in their state. If a debtor's income is above the state's median and the person can afford to pay $100 per month toward paying off debt, then the filer will be forced to file under Chapter 13.

Whether someone can afford to pay $100 per month is based on a formula that includes monthly income, expenses, and total amount of debt. Check your monthly income against your state's median income.

Ulzheimer says the means test will punish those who make too much money. Some people who need to file for Chapter 7 (and thus discharge most of their debts) won't be able to. By forcing people to file for Chapter 13, filers will end up paying more money -- not just to creditors, but to the person managing the payments.