Bankruptcy protection isn't technically a government program, but government courts are responsible for offering you protection from your creditors under bankruptcy laws. You can file two types of cases in bankruptcy court, and they're covered in the two following sections.

Chapter 7

In Chapter 7 bankruptcy, nearly all your debts are wiped out; that is, all unsecured debts (credit card balances, hospital bills, long-distance bills, and so on) are never paid back. Note that unsecured debts to the government, including student loans, taxes, and court-ordered alimony payments, are not wiped out and must continue to be paid back on an agreed-upon schedule.

Secured debt (cars, mortgage on a house, major appliances) is usually sold, and the proceeds pay off the lender. You may, however, get to keep your house (if you keep paying the mortgage), your car (if you keep paying on the loan, should you have one), and some personal property (TV and so on, as long as you don't owe any money on them). However, you generally will not get to retain an expensive house or car; those will have to be sold.

Many people believe that Chapter 7 bankruptcy is a convenient way to run up a bunch of debts and then walk away, scot-free. Perhaps you've even seen ads on TV that encourage you to declare bankruptcy and not have to worry about creditors calling anymore. They tell you that you'll keep your house and maybe even your car, and within a few years, it'll be like it never happened.

Baloney! Chapter 7 bankruptcy is a gut-wrenching heartache that can follow you for at least a decade.

Ask yourself this: Why would anyone — especially a creditor who lends money for a living — want to lend you money after you walked away from a pile of unpaid debts in the past? You ate the food, wore the clothes, used the products, and then decided that you didn't want to (or couldn't afford to) pay for them after all. Who would feel compelled to trust you after that? And because you can declare Chapter 7 bankruptcy once every six years, what's going to keep you from doing it again?

Firms that specialize in bankruptcy insist that new creditors won't know about your past, but that's simply not true. A Chapter 7 bankruptcy can stay on your credit report for ten years.

And don't forget that potential employers regularly request credit reports before extending an offer to hire you. They figure it tells them something about the sort of person you are — and they may be right! Even the leasing company at the apartment complex you want to move into and the electric company that's setting up electrical service in your name probably won't agree to work with you if they see a bankruptcy on your credit report.

Chapter 13

Chapter 13 bankruptcy is so much like credit counseling that it should never be your first choice — credit counseling should be. Like credit counseling, you present a plan to the court (including an entire budget that shows that the planned payments are possible) to pay off 100 percent of your debts over as long as five years.

A trustee collects and disperses your payments to creditors, usually charging you an additional 10 percent in the process, an amount that's much higher than what credit counselors charge. You also have to pay about $200 in court fees, and if you use an attorney, you'll have to pay his or her fees.

Just about every sort of debt is allowed to be paid off under Chapter 13 bankruptcy, even government loans. Unlike Chapter 7 bankruptcy, with Chapter 13, you usually hold on to your assets.

So why would people choose bankruptcy over credit counseling? Many simply don't know that credit counseling exists, yet chances are you have a nonprofit credit-counseling service right in your city or area.

Others believe that bankruptcy is simpler (it isn't) or costs less (it doesn't) than credit counseling. And a few people have had their credit-counseling proposals rejected by creditors, and they see bankruptcy as a last option.

Think of bankruptcy as your last resort; and if you have to choose, file Chapter 13 protection. But always meet with a credit-counseling agency before talking to a bankruptcy lawyer. You'll not only save money, you'll preserve your reputation, too.