In its basic form, bankruptcy eliminates all or part of your debt under the protection of the federal bankruptcy court. There are two types of bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 is nicknamed the "liquidation bankruptcy" because a bankruptcy trustee can sell or "liquidate" some of your belongings to pay back some or all of your debt. State and federal laws will determine which items can or cannot be included. Your car, household items and clothing are generally considered exempt.
Chapter 13 requires you to repay a portion of the debts you owe, so you must have a verifiable and reliable income. A 3-5 year repayment plan, showing how you will repay your creditors, is also required.
Bankruptcy does not wipe your financial slate clean. In fact, filing for bankruptcy will scar your credit report for 7-10 years, making it extremely difficult to get approved for most loans and credit cards. Filing for bankruptcy can eliminate credit card debt, medical bills, and unsecured loans, but it has no effect on debts such as tax liabilities and child or spousal support.
It's best to explore all your options before choosing to file bankruptcy. A financial advisor or bankruptcy counselor may be able to help you make your decision.