Chapter 7 or Chapter 13? What filing for bankruptcy really means.

In 1994, Mia Conyer of Baltimore had dug herself into a financial hole. "I had a car that I had purchased at a very high interest rate of 24%," says the 36-year-old professional, who was 19 when she purchased the car. By the time she realized she couldn't afford it, it was too late. "I returned the car with a voluntary repossession and they hit me with the balance and started garnishing my wages." At the advice of a relative, Conyer filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code, a move that she regrets. "It may seem like a quick fix, but [the bankruptcy] just fell off my credit report a couple of months ago," she says. Bankruptcy prevented Conyer from getting credit for 10 years.

Each year, millions of people file for bankruptcy hoping to create a clean financial slate. For some, it is a last-ditch effort to wipe out debts, but for others like Conyer, it can do more harm than good.

"It's a horrendous mistake for people to have maybe $5,000 or $8,000 worth of credit card debt or a car note to file bankruptcy," says Brooke Stephens, author of Talking Dollars and Making Sense: A Wealth-Building Guide for African-Americans (McGraw-Hill; $14.95). She says bankruptcy should be a last resort used "when you absolutely have no assets, no income, nothing on the horizon to resolve the problem."

But before you determine whether your particular situation warrants filing bankruptcy, you should familiarize yourself with the different kinds.

There are two common types of bankruptcy. Under Chapter 7, a consumer's assets are liquidated and the proceeds are given to a trustee who pays off as many debts as possible. Those debts that cannot be paid off are discharged. A Chapter 13 filing is more of a reorganization plan under which a consumer keeps assets such as property. Some assets are exempt, such as a 401(k) or a car, but it varies from state to state. A plan is drawn up for debts to be paid over a period of three to five years or less. Certain debts such as back taxes, student loans, alimony, and child support cannot be discharged.

Rod Griffin, public affairs manager for Experian credit agency, says many consumers don't realize that a Chapter 7 bankruptcy will remain on a credit report for 10 years, while a Chapter 13 bankruptcy will stay for seven years. Even if your claim is rejected by the court, it will still appear on your credit report. Griffin says if a lender extends credit to someone who has filed for bankruptcy, his or her interest rates are generally much higher.

Ted Travis, vice president and operations manager with Residential Home Loan Centers in Laurel, Maryland, works with borrowers who have filed for bankruptcy under Chapter 13 to refinance their homes and use the equity to pay off debts. Such an action, called a bankruptcy buyout, must be approved by the Bankruptcy Court. While it enables consumers to pay off the debt sooner, it does nothing to take the bankruptcy mark off of a credit report until seven years has passed, and customers are still likely to get a less favorable rate.

Legislation that would make it more difficult for consumers to file for bankruptcy under Chapter 7 is making its way through Congress, which some analysts say is enticing people to file now before such laws come to pass, while others simply want a chance to start over and prove they can now manage their finances responsibly.

For Conyer, good money management skills are now a must. "I'm trying to rebuild from scratch because everything that l had already built up got taken away," she says. "Once you file--whether you're doing good, bad, or indifferent--it's there [on your credit report]. That's the first thing lenders see."