Types of Bankruptcies for Individuals: Your Guide to Financial Relief

Sound familiar? You’re not alone. Thousands of Americans face this exact situation every single day. And here’s what most people don’t realize: bankruptcy isn’t the end of your financial life—it’s actually designed to give you a fresh start.

Let’s cut through the confusion and talk about the types of bankruptcies for individuals in the United States. No judgment, no legal jargon—just straight talk about your options.

What Are the Main Types of Bankruptcies for Individuals?

When we talk about personal bankruptcy in the U.S., we’re really talking about two main options: Chapter 7 and Chapter 13. Think of them as two different paths to the same destination—getting out from under crushing debt.

Chapter 7 bankruptcy is the “liquidation” option. It’s fast, typically wrapping up in 3-6 months. The bankruptcy trustee may sell certain non-exempt assets to pay your creditors, and then most of your remaining unsecured debts get wiped clean. It’s like hitting the reset button on your financial life.

Chapter 13 bankruptcy is the “reorganization” plan. Instead of liquidating assets, you create a court-approved repayment plan lasting 3-5 years. You keep your property and pay back what you can afford based on your income. It’s more like a structured payment plan with legal protection.

Both types offer relief from creditor harassment, wage garnishments, and that constant financial anxiety. But which one fits your situation? Let’s dig deeper.

Chapter 7 vs. Chapter 13: What’s the Real Difference?

Here’s where things get interesting. These two bankruptcy types serve different people in different situations.

Think of it this way: Chapter 7 is the express lane. If you have limited income and few assets to protect, it gets you through bankruptcy court quickly. Most people who qualify for Chapter 7 don’t have to give up much—state exemptions often protect your home equity, car, retirement accounts, and essential personal items.

Chapter 13 is the scenic route with more control. If you’re behind on your mortgage or car payments and want to catch up while keeping your property, this is your ticket. It’s also great if you make too much money to qualify for Chapter 7 but still need debt relief.

Who Qualifies for Chapter 7 Bankruptcy?

Let’s talk about the infamous means test. This is what determines if you’re eligible for Chapter 7, and honestly, it’s not as complicated as it sounds.

The means test compares your income to your state’s median income. If you earn less than the median, you’re probably good to go. If you earn more, the test looks at your disposable income after allowed expenses.

Here’s the thing: the means test isn’t designed to keep honest people out. It’s there to prevent abuse by people who could actually afford to pay back their debts. According to the U.S. Courts, the vast majority of Chapter 7 filers successfully complete the process.

You’ll also need to complete credit counseling from an approved agency within 180 days before filing. It’s a one-time requirement, typically done online, and it costs around $10-50.

How Does Chapter 13 Bankruptcy Work?

Chapter 13 operates differently. Instead of liquidating assets, you propose a repayment plan to the bankruptcy court. This plan details how much you’ll pay to creditors over the next three to five years based on your disposable income.

The beauty of Chapter 13? You get to keep your stuff. Your house, your car, your wedding ring—all protected as long as you stick to the payment plan.

Your monthly payment goes to the bankruptcy trustee, who then distributes it to your creditors according to the court-approved plan. Priority debts (like taxes and child support) must be paid in full, but unsecured debts like credit cards often get only a fraction of what’s owed.

After you complete your payment plan—and here’s the kicker—any remaining eligible debts get discharged. Gone. Finished. You’ve earned your fresh start.

Will You Lose Your House or Car in Bankruptcy?

This is the question that keeps people up at night. The answer? Not necessarily—and often, no.

In Chapter 13, you can absolutely keep your home and car as long as you continue making payments. That’s the whole point. If you’re behind on payments, Chapter 13 lets you catch up over time while staying in your home.

Chapter 7 is trickier but still offers protection. Every state has exemption laws that protect certain property from liquidation. These exemptions typically cover:

• A certain amount of home equity (varies widely by state)
• One vehicle up to a specific value
• Household goods and clothing
• Retirement accounts
• Tools needed for your job

In many cases, people who file Chapter 7 don’t lose anything because their equity falls within these exemption limits. If you’re current on your mortgage and car payments and the equity is protected, you can usually keep them by continuing payments.

Talk to a bankruptcy attorney about your state’s exemptions. Some states are incredibly generous, while others are more restrictive. This is where professional guidance is worth every penny.

How Does Bankruptcy Affect Your Credit Score?

Let’s be honest: bankruptcy does hurt your credit. There’s no sugarcoating it. A bankruptcy filing will appear on your credit report for 7-10 years depending on the chapter.

But here’s what nobody tells you: if you’re already months behind on payments, constantly missing bills, and facing collections, your credit is already damaged. Bankruptcy might actually be a step toward rebuilding.

The impact lessens over time. Many people start rebuilding credit within 6-12 months after discharge by:

• Getting a secured credit card
• Making all payments on time
• Keeping credit utilization low
• Gradually building positive payment history

Think of bankruptcy as financial reset button. Yes, it temporarily damages your credit, but it stops the bleeding. You can’t rebuild while you’re still drowning.

What Debts Can Be Discharged in Bankruptcy?

Most unsecured debts can be discharged, including:

• Credit card balances
• Medical bills
• Personal loans
• Utility bills
• Past-due rent (in some cases)
• Old tax debts (with restrictions)

However, certain debts are generally not dischargeable:

• Recent student loans (with rare exceptions)
• Child support and alimony
• Recent taxes
• Court fines and penalties
• Debts from fraud or intentional harm
• Debts not listed in your bankruptcy petition

Student loans deserve special mention. While they’re notoriously difficult to discharge, it’s not impossible. You’d need to prove “undue hardship” through a separate legal proceeding, which is a high bar to clear. For most people dealing with student loan debt, other repayment options work better.

How Long Does the Bankruptcy Process Take?

Chapter 7 moves quickly. From filing to discharge, you’re looking at roughly 3-6 months. The timeline breaks down like this:

• Filing day: automatic stay kicks in immediately (creditor calls stop)
• 20-40 days later: meeting of creditors (341 meeting)
• 60-90 days after that: discharge order issued

Chapter 13 is a marathon, not a sprint. Your repayment plan lasts 3-5 years depending on your income and debts. But remember—you’re protected during this entire time. The automatic stay remains in effect, and creditors can’t touch you as long as you make your plan payments.

What Is the Cost of Filing for Bankruptcy?

Let’s talk money. Filing fees for 2025 are:

• Chapter 7: $338
• Chapter 13: $313

But that’s just the court filing fee. Attorney fees vary widely:

• Chapter 7: Typically $1,000-$3,500 depending on your location and case complexity
• Chapter 13: Usually $3,000-$6,000 (often included in your repayment plan)

Before you panic about the cost, consider this: many bankruptcy attorneys offer payment plans or free consultations. Some even allow you to include their fees in your Chapter 13 repayment plan. And when you compare attorney fees to the tens of thousands of dollars in debt you might discharge, it’s often worth the investment.

If money is extremely tight, look into legal aid societies or pro bono programs in your area. Some offer free or low-cost bankruptcy assistance to qualifying individuals.

Will Bankruptcy Stop Creditor Harassment?

Absolutely, and immediately. This is one of bankruptcy’s most powerful features.

The moment you file, the automatic stay goes into effect. This is a court order that stops virtually all collection activities:

• No more phone calls from collectors
• No more threatening letters
• Wage garnishments stop
• Lawsuits get put on hold
• Foreclosure proceedings pause
• Repossessions halt

Creditors who violate the automatic stay face serious consequences, including fines and sanctions from the bankruptcy court. They know this, so most stop contacting you immediately.

For many people, this relief from constant harassment is worth the bankruptcy filing alone. The mental and emotional peace of mind is priceless.

What Happens After Bankruptcy Is Discharged?

Once your discharge is approved, you’re legally free from the discharged debts. You don’t owe them anymore. Creditors can’t collect on them, report them to credit agencies, or take you to court over them.

This is your fresh start. But it doesn’t mean you’re debt-free forever—you still need to rebuild responsibly. Here’s what happens next:

1. Your credit report gets updated showing the discharge
2. You can start rebuilding credit through responsible financial habits
3. You keep property protected by exemptions or your repayment plan
4. You’re free to apply for new credit (though rates may be higher initially)

Many people find that life after bankruptcy is surprisingly… normal. Without the crushing weight of unmanageable debt, you can focus on building a secure financial future. You can save for emergencies, plan for retirement, and actually enjoy your paycheck instead of watching it disappear to creditors.

Do You Need an Attorney to File for Bankruptcy?

Technically, you can file pro se (without an attorney). But here’s the reality: bankruptcy law is complex, and mistakes can be costly.

A bankruptcy attorney can:

• Determine which chapter is best for your situation
• Maximize your exemptions to protect property
• Ensure all paperwork is accurate and complete
• Represent you at hearings
• Handle objections from creditors
• Spot potential issues before they become problems

Think of it this way: you could perform surgery on yourself too, but would you? Bankruptcy has long-term financial and legal consequences. Having an expert guide you through the process is almost always worth the cost.

Most bankruptcy attorneys offer free consultations. Take advantage of these to interview a few lawyers, ask questions, and find someone you trust. Look for attorneys who specialize in consumer bankruptcy and have good reviews from past clients.

How Often Can You File for Bankruptcy?

You can’t file bankruptcy repeatedly to dodge debts. The bankruptcy code has waiting periods between filings:

8 years between Chapter 7 filings

4 years between a Chapter 7 filing and a Chapter 13 filing

2 years between Chapter 13 filings (if seeking another discharge)

These waiting periods are calculated from filing date to filing date, not discharge date. They exist to prevent abuse while still allowing people who experience subsequent financial hardships to get relief.

Can Both Spouses File for Bankruptcy Together?

Yes, married couples can file jointly or individually, depending on their situation. Filing jointly often makes sense when:

• Most debts are in both names
• You want to save on filing fees
• Both spouses need debt relief

Filing individually might be better when:

• Only one spouse has significant debt
• One spouse has better credit you want to protect
• State exemptions work better for individual filings

There’s no universal “right” answer. Your decision should depend on your specific debts, assets, and financial goals. This is another area where a bankruptcy attorney’s advice is invaluable.

What Is the Goal of Bankruptcy?

Strip away all the legal terminology, and bankruptcy has one primary purpose: providing a fresh financial start to honest debtors who are overwhelmed by debt.

The U.S. bankruptcy system recognizes that sometimes good people face bad circumstances—job loss, medical emergencies, divorce, business failures. These situations can create debt that’s impossible to escape through normal means.

Bankruptcy provides a legal, ethical path forward. It balances giving debtors relief while ensuring creditors receive what can reasonably be paid. It’s not about dodging responsibility—it’s about acknowledging financial reality and providing a structured way to move forward.

Think of bankruptcy as a safety net. It’s there when you need it, providing protection and a path back to financial stability. Millions of Americans have used bankruptcy to rebuild their lives and go on to achieve financial success.

Making Your Decision: Is Bankruptcy Right for You?

Bankruptcy isn’t right for everyone, and it’s not a decision to make lightly. Before filing, consider:

• Have you explored alternatives like debt consolidation or settlement?
• Are you facing immediate threats like foreclosure or wage garnishment?
• Is your debt truly overwhelming, or could you manage it with better budgeting?
• How will bankruptcy affect your future financial goals?

Sometimes the answer is yes, bankruptcy is the right choice. Other times, alternative debt repayment strategies might work better.

The key is being informed and honest about your situation. Don’t let pride or fear keep you trapped in impossible debt. But also don’t rush into bankruptcy without understanding all your options.

Your Next Steps

If you’re seriously considering bankruptcy, here’s your action plan:

1. Gather your financial documents: income statements, debt lists, asset lists, tax returns
2. Research bankruptcy attorneys in your area and schedule free consultations
3. Complete the required credit counseling before filing
4. Make an informed decision based on professional advice and your specific situation
5. Take action once you’ve chosen your path

Remember, seeking help isn’t weakness—it’s wisdom. Financial struggles happen to good, hardworking people every single day. The bankruptcy system exists precisely for situations like yours.

The Bottom Line

Understanding the types of bankruptcies for individuals empowers you to make the right choice for your financial future. Whether Chapter 7’s quick relief or Chapter 13’s structured repayment fits your situation better, both offer legal protection and a genuine fresh start.

You’re not alone in this journey. Bankruptcy attorneys, credit counseling agencies, and financial advisors exist to help people exactly like you. Take that first step—schedule a consultation, ask questions, and explore your options.

Your financial stress doesn’t have to last forever. With the right information and support, you can move from drowning in debt to building the stable financial future you deserve. The fresh start is waiting. All you have to do is reach for it.

Ready to take control of your financial future? Explore more money management strategies and financial guidance at Wealthopedia to continue your journey toward financial freedom.

Disclaimer: This article provides general information about bankruptcy and should not be considered legal advice. Bankruptcy laws vary by state and individual circumstances. Consult with a qualified bankruptcy attorney for advice specific to your situation.