When times get tough, well, you should be aware of all your options!

Truth be told, bankruptcy may happen no matter the state of the economy; risky investments, unwise business decisions, poor judgment, bad luck, there are numerous reasons for you to want to take a closer look at what bankruptcy means and how it works.

Bankruptcy is a matter of the federal law, meaning it will override the state law if in disagreement. There is at least one bankruptcy court in every state. The optimal outcome of any bankruptcy case is the discharge, which is an order from the bankruptcy court permanently disallowing any creditor from attempting to satisfy a debt against you. The discharge is also known as a bankruptcy injunction.

In almost all the cases, a trustee is automatically appointed from the panel to administrate the case by reviewing the debtor’s documentation and to be vigilant for fraudulent conduct. The trustee owes a fiduciary duty to the creditors of a debtor and must collect as many assets as possible to pay creditors.

The full process can last from a few month to a few years, during which your whole financial life will be exposed to the public. Apart from being time consuming, bankruptcy may be quite costly too, with filing fees and, in most cases, the need of enrolling professional help.

As of 2011, there are six bankruptcy chapters; apart from Chapters 7, 11 and 13, which are the most common and known, there are also Chapter 9, 12 and 15.

Chapter 7 bankruptcy is one of the most common types for both consumers and businesses. It is also called liquidation bankruptcy because it involves the liquidation of assets as well as the discharge of some debts.

To make sure that consumers don’t abuse the bankruptcy system, the government law requires a means test for all Chapter 7 bankruptcy filers who make more than the median income in their states.

If you make more than your state's median income and your average monthly disposable income over the next 5 years is more than $100, then you fail the means test and would not be able to file Chapter 7 bankruptcy. Your case would either be dismissed or converted to a Chapter 13 bankruptcy case.

Chapter 7 bankruptcy case starts when you file a petition with your local bankruptcy court. Along with the petition, you are required to file a schedule of assets and liabilities, a statement of current income and liabilities, a statement of financial affairs, and a schedule of executory contracts and unexpired leases, together with your most recent tax return and any returns filed while your case is still open.

Once you file bankruptcy, a trustee will be assigned to your case. The trustee will first review your assets and determine whether they are exempt or nonexempt. Nonexempt assets will be sold and the proceeds will be used to pay your creditors. Exempt assets, on the other hand, remain yours.

If the trustee determines that all your assets are exempt, then he'll file a "no asset" report with the court. Most Chapter 7 bankruptcy cases are no asset cases.

A Chapter 7 bankruptcy is typically discharged four months after the petition was filed. Discharge papers will automatically be mailed to your creditors letting them know that the debt has been discharged and they cannot collect on it anymore.

A Chapter 7 bankruptcy filing will remain on your credit report for up to 10 years. You cannot file another Chapter 7 bankruptcy for 8 years or a Chapter 13 bankruptcy for 4 years.

If you cannot file a Chapter 7 bankruptcy because your income is too high or you have assets that you want to keep, you may be able to file Chapter 13 bankruptcy.

Chapter 13 is mainly for individuals, but also for unincorporated businesses (self-employed individuals). Under Chapter 13 you are allowed to repay some or all of your debts from your projected future income with a three to five year repayment plan. For Chapter 13 your unsecured debts must be less than $360,400, and your secured debts less than $1,081,400.

Also, you must get credit counseling from a court-approved credit counseling agency 180 days before filing bankruptcy.

If you fail to make your monthly payments, your case could be dismissed or converted to a Chapter 7 bankruptcy case. Failing to pay your child support, alimony, or taxes could also result in a case dismissal.

You can have more debt discharged through Chapter 13 than Chapter 7, although the process is complicated. Certain debts cannot be discharged, including: mortgage payments, child support and alimony, certain taxes, student loans, debts resulting from death or injury while you were driving under the influence of drugs or alcohol, traffic tickets or criminal fines, debts obtained through fraud.

A Chapter 13 bankruptcy filing will remain on your credit report for up to 7 years.

Chapter 11 bankruptcy is typically used by businesses willing to reorganize themselves in order to survive, and whose debts exceed Chapter 13 limits.

Chapter 11 is expensive and time consuming; it often proves to be unsuccessful in the end.

The company files a plan of reorganization outlining how it will deal with its creditors. Creditors vote on the plan. If the court finds the plan is fair and equitable, they will approve it. It may take over a year to confirm the plan.

Because of the amount of time involved, a preplanned, pre-agreed approach, sometimes called a pre-packaged bankruptcy by the parties, may facilitate the desired result.

Chapter 12 bankruptcy is very similar to Chapter 13, the main difference being that, if a family farmer, at least 50%, and if a family fisherman at least 80%, of the total debts that are fixed in amount (exclusive of debt for the debtor's home) must be related to the farming or commercial fishing operation.

Chapter 12 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a "consumer debt" from any individual who is liable with the debtor.

Chapter 9 bankruptcy is available exclusively to municipalities and assists them in the restructuring of debts.

Because municipalities are entities of State governments, the power of Congress to adjust their debts through bankruptcy is limited considerably by the 10th and 11th Amendments. Some states do not permit Chapter 9 filings without authorization.

The most well known Chapter 9 was used by Orange County, California in 1994 to adjust its debts.

Chapter 15, which is the newest addition to the lot, applies only to companies that have assets in several countries. Its goal is to promote cooperation between the United States courts and parties in interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases.

Now, returning to the more “personal” forms of bankruptcy, if you are in serious debt, try all other options first. It may be that some credit counseling can help negotiations with your creditors, who would prefer to settle a debt with you than have it discharged in bankruptcy.

If you are seriously considering bankruptcy, contact a specialized attorney to help you through all the complexity of the process.