6 things to ask before filing for bankruptcy

If mounting credit card bills are threatening to pull you under, you may be considering bankruptcy as a way to hit the restart button.

The American Bankruptcy Institute expects worsening economic conditions to drive up the number of consumer filings this year to their highest level since stricter bankruptcy terms went into effect in 2005.

The more than 880,000 filings through October have already eclipsed the 823,000 filings for all of 2007. It's no wonder, with government figures showing Americans are lumbering under some $900 billion in credit card debt.

Bankruptcy comes with serious consequences for your credit profile, however. So if you're considering bankruptcy as a way out, here are six questions to ask:

1. WHAT TYPE OF BANKRUPTCIES ARE THERE?

There are two bankruptcy options for individuals.

Most people file for Chapter 7 bankruptcy, which wipes clean unsecured debt such as credit card or medical bills. What won't disappear are fixed debts including mortgages, student loans, taxes and child support.

Under the second option, Chapter 13 bankruptcy, filers agree to repay creditors over three to five years. Chapter 13 is typically for people who think they will be able to repay lenders and hold onto their home and other belongings.

There is no debt limit to file for Chapter 7. For Chapter 13, however, people can only have about $1 million in secured debt and some $350,000 in unsecured debt. This is to prevent businesses or wealthy individuals with business debts from applying.

2. WHO CAN APPLY?

Eligibility for Chapter 7 is determined by a formula known as the means test, which weighs your income against your ability to pay creditors. Your attorney calculates the test, and it is vetted by a trustee.

A family earning $100,000 or less generally won't have problems filing for Chapter 7 because the means test factors in living expenses. People who received a Chapter 7 discharge in the past eight years are not eligible for another discharge.

A similar means test is used to determine a payment plan for Chapter 13. People who filed for a Chapter 7 bankruptcy resulting in discharge in the past four years or a Chapter 13 case resulting in a discharge in the past two years are not eligible for another discharge.

3. HOW DO I GET STARTED AND WHAT ARE THE COSTS?

Depending on the complexity of a Chapter 7 case, you'll need to pay a lawyer an upfront fee of about $1,000 to $2,000, said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. Chapter 13 cases usually cost about $2,000 to $3,000 because they require developing a payment plan over several years.

In both cases, there is a court filing fee of about $300. You'll also need to pay roughly $100 for a mandatory credit counseling session and budgeting class.

Both sessions typically last about 45 minutes and may be in person, via phone or online.

If these costs seem out of reach, there are nonprofit groups that provide pro bono legal services. Court fees may also be waived for those who can't afford them.

4. WHAT CAN I KEEP?

Pensions and 401(k) retirement accounts are usually safe under bankruptcy proceedings.

Depending on where you live, you may also be allowed to keep a limited amount of property under Chapter 7. North Carolina law allows each spouse or individual to keep $18,500 equity in a personal residence. Some states also have capped exemptions for motor vehicles.

"Wild card" exemptions in several states let people keep as much as $20,000 in cash or other assets. The court typically won't go after property worth less than $1,000, because it might take more to administer the liquidation than it's worth.