Bankruptcy is referred by so many as a "last resort." Not necesarily. For those facing foreclosure, bankruptcy may be the best solution available. If you have a lot of debt and you lose your home through foreclosure, you unload your house payment but you still have all your other debts. You can't pay them with a debt consolidation loan because you will have no home equity. In most states you can be required to pay your lender for the difference between what they are able to sell your foreclosed home for and what you owe on your mortgage (this is called a deficiency)--so you don't really get out of your mortgage, after all! And then, you have trashed credit and you still have to find (and pay for) a place to live. Not much of a solution.

Bankruptcy, however, can be a way out whether you do a Chapter 7 or 13. Chapter 7 may work best if you:

1. Can pass a Chapter 7 "means test." Here is a list of median income by state and family size. If yours is less than what's on here, you pass. Otherwise, the calculations are more complicated but involve subtracting necessary expenses like utilities, housing, and taxes and determining if you have enough "disposable income" to pay some or all of your bills.

2. Have very few non-exempt assets. Because Chapter 7 is a "liquidation" bankruptcy, your assets are taken and used to discharge your debts. So if you have assets, you might want to do a Chapter 13, which involves restructuring your debts to manageable payments and discharging them over time.

3. Have primarily unsecured debt like credit card obligations. Debts like child support, student loans, and most tax debt can't be discharged by a bankruptcy so don't file to get rid of them--it won't work. Debt secured by things like cars and houses can't really be discharged unless you want the creditors to take your things. However, a Chapter 7 filing can keep the lender from getting a deficiency judgment (collecting extra money from you if the property is worth less than what you owe on it). Chapter 7 may help you afford your house payment by relieving you of your unsecured payment obligations (like credit card bills). If you can't afford your house payment even with the discharge of other debts, however, you will probably lose your home.

Chapter 13 might be a good solution if:

1. You have assets that you don't want to surrender in a bankruptcy proceding. You don't get the clean break afforded by a Chapter 7 filing, but paying some or all of your obligations over time may cost you less in the long run. Chapter 13 creates a plan for repaying your creditors, allowing you to retain your home, and if you stick to it your obligations will be discharged in a few years. And you can save your possessions.

2. You fail a Chapter 7 means test. This means the government has determined that you can afford to repay at least some of your obligations. The bankruptcy trustee administers your plan, which may involve debt settlement, interest rate reduction, payment reduction, having arrearages added to the balance and the account brought current, or other options. Chapter 13 can get your expenses to a level that makes it possible to pay your mortgage and keep out of foreclosure.

3. Want to minimize the hit to your credit rating. Lenders view Chapter 13 much more favorably than Chapter 7. for example, FHA will allow those who fiole Chapter 13 to get a mortgage a year before they will approve someone who files a Chapter 7.

Bankruptcy is almost always better than foreclosure. Many lenders consider foreclosure the blackest mark you can have on your credit. And you could end up owing a deficiency. And you may have a very hard time finding a rental or a mortgage for years after your house is taken. Of course, to be certain of choosing the right solution for you, check with a reputable debt counseling service, attorney, or mortgage counselor (you can find them through HUD).