Many who file for bankruptcy use home equity in their settlement arrangement. Bankruptcy does not remove any liens on a home such as a mortgage. But if there is more home equity built up than is required to cover the loan, it is an asset that can be tapped into for needed cash in accordance with the rules of the type of bankruptcy a person has filed.

Bankruptcy is a legal proceeding where a debtor declares an inability to pay debts as they become due. Since the Bankruptcy Abuse Protection and Consumer Protection Act of 2005, personal bankruptcy filings for the year ending June 30, 2006, fell 9.46 percent to 1,453,008.

The two most popular bankruptcy options are:

Chapter 7 - Its purpose is to achieve a fair distribution of the debtor’s available non-exempt property. Unsecured debts not reaffirmed are discharged, providing a fresh financial start.

Chapter 13 - Available only to someone with regular income whose debts do not exceed specific amounts. It is used to budget future earnings under a plan to pay unsecured creditors.

In a chapter 7 bankruptcy, every state has its own laws regarding the type and amount of property a person can keep. Under chapter 13, a person does not have to surrender any property.

“It’s important to have competent counsel advise you,” says Ted Janger of The American Bankruptcy Institute; “both about the choices among chapters and about how best to make sure that bankruptcy operates to solve your financial difficulties, rather than just as a hiatus.”

Bankruptcy negatively impacts your credit in the short and medium term because it remains as a black mark on your credit report for up to ten years. However, some creditors offer new loans to bankruptcy debtors because they cannot file bankruptcy again for many years.