A last resort, if you find yourself unable to pay off your debts, is filing for personal bankruptcy. While such a situation is very stressful and will all but put an end to your credit rating for a long time, the federal bankruptcy law is designed to provide someone with a fresh start. It's a step that's considered when an individual’s debt is climbing at a rate faster than he or she can pay it off.

Bankruptcy is something that one enters into with the help of a qualified bankruptcy attorney, who will usually look first to see if there are any possible alternatives. Should bankruptcy be the only option, you'll begin by filing a petition with a statement of your assets and liabilities, as well as a list of your creditors.

There are two types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy involves liquidating your assets and turning them over to the courts. A trustee of the courts follows a court-supervised procedure, reduces the debtor’s assets to cash, and then pays the creditors. State or federal law will exempt some assets in both types of bankruptcy.