Looking for a fresh financial start? Bankruptcy might be your answer. The US bankruptcy system offers four distinct paths—Chapter 7, Chapter 11, Chapter 13, and Chapter 12—each designed for different situations and needs. The right choice depends on your financial circumstances, assets, and long-term goals.
The Four Main Types of Bankruptcy in the United States
Bankruptcy laws provide structured relief for individuals and businesses struggling with overwhelming debt. Each chapter serves a specific purpose:
Chapter 7: Liquidation Bankruptcy
Often called “straight bankruptcy,” Chapter 7 bankruptcy allows individuals and businesses to eliminate most unsecured debts through asset liquidation. This process typically takes 4-6 months and offers a clean slate for those who qualify.
Who it’s for: Individuals with limited income and businesses that want to close operations.
How it works: A court-appointed trustee sells non-exempt assets to pay creditors. Many cases are “no-asset,” meaning you keep most or all of your property through exemptions.
Requirements: You must pass a means test that evaluates your income against your state’s median income.
Chapter 13: Wage Earner’s Plan
Chapter 13 bankruptcy helps individuals with regular income create a 3-5-year repayment plan while keeping their assets.
Who it’s for: Individuals with a steady income who want to keep their property while paying back some or all of their debt.
How it works: You propose a repayment plan based on your income. A trustee collects your payments and distributes them to creditors.
Requirements: Your unsecured debts must be under $419,275, and secured debts under $1,257,850 (as of 2025).
Chapter 11: Reorganization Bankruptcy
Chapter 11 allows businesses to restructure their debts while continuing operations.
Who it’s for: Primarily businesses, though some individuals with substantial debt can file.
How it works: The debtor remains in control as “debtor in possession” and proposes a reorganization plan that creditors and the court must approve.
Requirements: No debt limits, but requires significant administrative work and legal assistance.
Chapter 12: Family Farmer and Fisherman Bankruptcy
This specialized form of bankruptcy helps family-owned agricultural operations.
Who it’s for: Family farmers and fishermen with regular annual income.
How it works: Similar to Chapter 13 but with provisions specifically tailored to farming and fishing operations.
Requirements: At least 50% of income must come from farming or fishing operations.
Comparing Bankruptcy Options
| Bankruptcy Type | Primary Purpose | Who Can File | Typical Duration | Key Advantage |
| Chapter 7 | Liquidation | Individuals, businesses | 4-6 months | Quick debt elimination |
| Chapter 13 | Repayment Plan | Individuals with regular income | 3-5 years | Keep assets while repaying |
| Chapter 11 | Reorganization | Businesses, wealthy individuals | Months to years | Continue operations during the restructuring |
| Chapter 12 | Farm/Fishing Restructuring | Family farmers and fishermen | 3-5 years | Specialized for agricultural businesses |
Choosing the Right Bankruptcy Path
Selecting the best bankruptcy option depends on several factors:
- Your income level – Chapter 7 requires passing a means test, while Chapter 13 requires regular income.
- Assets you want to protect – If keeping your home or car is important, Chapter 13 might be preferable to Chapter 7.
- Debt types – Not all debts are dischargeable. Student loans, alimony, and certain taxes typically survive bankruptcy.
- Business status – Business owners have different considerations than individual consumers.
Life After Bankruptcy
Filing bankruptcy impacts your credit score and financial options, but recovery is possible. Many people rebuild credit after bankruptcy by:
- Getting secured credit cards
- Becoming an authorized user on someone else’s account
- Taking out credit-builder loans
- Making all payments on time
Bankruptcy remains on your credit report for 7-10 years, but its impact diminishes over time with responsible financial behavior.
Alternatives to Consider
Before filing bankruptcy, consider these alternatives to get out of debt:
- Debt consolidation – Combining multiple debts into a single, often lower-interest payment
- Debt settlement – Negotiating with creditors to accept less than the full amount owed
- Credit counseling – Working with a nonprofit agency to develop a debt management plan
- Personal budget overhaul – Cutting expenses and increasing income to pay down debt
When to Seek Professional Help
Bankruptcy is complex, with significant legal and financial implications. Consider consulting:
- A bankruptcy attorney for legal advice
- A credit counselor for pre-bankruptcy counseling (required before filing)
- A financial advisor to understand long-term implications
Final Thoughts
Bankruptcy isn’t the end of your financial journey—it’s often a new beginning. Understanding the different types helps you make an informed decision about whether bankruptcy is right for you and which chapter best fits your situation.
Ready to take control of your financial future? Visit Wealthopedia for more resources on debt management, credit rebuilding, and smart financial planning.
