Dear Credit Care,

We have a home that does have equity, but we don't want to sell because our credit is ruined and we won't be able to get another home. We have only credit card debt besides our home mortgage. We can't pay all the cards. We have been trying for a long time and have paid them down a lot, but can't any longer. Should we file bankruptcy? Can we keep our home when we file, or should we just stop paying the credit cards? We really want to keep our home! 

- Laura

Dear Laura,

Bankruptcy is certainly an option if you truly can't pay your credit cards. However, because the laws changed in 2005, you may not qualify for a Chapter 7 filing, in which your credit card debt would be eliminated in full. Unless your income is less than the median income for your state of residence, you would most likely instead have to file under Chapter 13, in which at least a portion of your credit card debt would have to be repaid.

Should you file a Chapter 13, you would be allowed to keep your home. How much you would have to pay your creditors in a Chapter 13 filing would depend on your income and how much you owe in total. Keeping your house in a Chapter 7 filing (should you qualify for it) would depend on whether the equity in your home would be considered exempt in your state. Due to the many different variables involved with filing bankruptcy, it is best to hire an attorney to assist you with the process. If you can't afford an attorney the American Bankruptcy Institute has a list of pro-bono bankruptcy attorneys.

The bankruptcy laws now require that consumers who wish to file for bankruptcy must complete a pre-bankruptcy credit counseling session. Talking with a credit counselor will help you determine if you have other options for paying your credit card debt, or if filing for bankruptcy is your only alternative. The website for the Treasury Department's bankruptcy division has a list of approved credit counseling agencies for your district.

Once you have participated in the mandatory credit counseling session you will have a better idea of whether or not you need to file for bankruptcy, if you can afford to pay your credit card debt through a  debt management plan or if by making some adjustments to your spending, you can continue to pay your creditors on your own.

Stopping payments on your credit card accounts prior to filing bankruptcy is not a good idea. If you don't pay, your creditors could sue in court and receive a judgment for the amount owed. With a judgment the creditor could garnish wages (if allowed in your state) or place a lien on your home. Not paying takes the choices out of your hands and gives them to your creditors.

Filing for bankruptcy will severely damage your credit for many years, but is a viable option if you have no other workable alternatives. To assure your home is protected in the bankruptcy, be sure you hire an attorney who is experienced with the bankruptcy laws in your state.

Handle your credit with care!

See related: Considering bankruptcy? Use the 'divide by 60' test