Before we dive deep, here’s the cliff notes version. The U.S. bankruptcy system includes Chapter 7, Chapter 13, Chapter 11, Chapter 12, Chapter 9, and Chapter 15, with each designed for different financial situations and debtor types.
For most regular folks dealing with overwhelming debt, you’re looking at two main options: Chapter 7 or Chapter 13. These are the heavy hitters when it comes to personal bankruptcy. The others? They’re more specialized—think businesses, farmers, or even entire cities.
Quick stat that might surprise you: Individual Chapter 7 bankruptcy filings increased 15 percent during the first nine months of 2025 compared to the same period in 2024, with 249,152 cases filed. You’re definitely not alone if you’re considering this path.
Chapter 7 Bankruptcy: The Fresh Start Option
What It Is
Chapter 7 is what most people think of when they hear “bankruptcy.” It’s a legal process that allows you to eliminate certain debts you can’t repay like credit card bills, medical bills, payday loans, and more.
Here’s how it works: You file paperwork with the court. A trustee looks at your assets and debts. If you have non-exempt property (fancy stuff beyond basic necessities), they might sell it to pay creditors. Then—usually within three to four months—you get a discharge that wipes out eligible debts.
Fast. Clean. Done.
Who Qualifies for Chapter 7?
This is where things get real. You can’t just file Chapter 7 because you feel like it. You must pass the means test, which compares your average monthly income over the past six months to the median income for your household size in your state.
If you earn less than your state’s median income? You’re golden. You automatically qualify.
If you earn more? The court digs deeper into your expenses to see if you have disposable income left over each month. No disposable income means you might still qualify.
Good news: About 90% of people who file for bankruptcy qualify for Chapter 7 based on income alone.
What Debts Get Wiped Out?
Chapter 7 is particularly good at eliminating:
- Credit card debt
- Medical bills
- Payday loans and other unsecured personal loans
- Utility bills
- Old tax debt (in some cases)
But here’s the catch: Some debts usually can’t be discharged in Chapter 7, such as student loans, child support, alimony, recent taxes, and debts from fraud or malicious injury.
Will You Lose Your Stuff?
This is the million-dollar question—or maybe the $31,575 question, to be exact.
The federal bankruptcy exemption for homestead property is $31,575 as of April 1, 2025, with a motor vehicle exemption of $5,025. These exemptions protect your basic property from being sold.
In plain English? If your car is worth $4,000 and the exemption is $5,025, you keep it. If your home equity is less than $31,575, it’s protected (though state exemptions vary and may be higher).
Most people in Chapter 7 avoid debt liquidation entirely because their property falls within these exemptions.
Chapter 13 Bankruptcy: The Repayment Plan Route
What Makes It Different
If Chapter 7 is a sprint, Chapter 13 is a marathon—but one where you get to keep your house and car.
Chapter 13 bankruptcy is also called a wage earner’s plan, enabling individuals with regular income to develop a plan to repay all or part of their debts over three to five years.
Instead of liquidating assets, you propose a repayment plan. The court-appointed trustee distributes your monthly payments to creditors according to priority rules. After you complete the plan, remaining eligible debts get discharged.
Who Should Choose Chapter 13?
Chapter 13 makes sense if:
- You’re behind on your mortgage and want to catch up without losing your home
- You have a car payment in arrears and can’t afford to lose transportation
- Your income is too high to qualify for Chapter 7
- You have non-exempt property you want to protect
- You want to strip off a second mortgage on an underwater property
Basically, if you have something valuable to protect and steady income to make payments, Chapter 13 could be your best friend.
How Long Does It Last?
If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period. If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years.
Most people end up in five-year plans. Yes, it’s a long commitment. But it beats losing your home.
What You Have to Pay
Your Chapter 13 plan must pay certain debts in full:
Priority debts: Recent taxes, child support arrears, alimony
Secured debts: Mortgage and car loan arrearages
Administrative costs: Trustee fees, filing fees, attorney fees
For unsecured debts like credit cards? The plan need not pay unsecured claims in full as long as it provides that the debtor will pay all projected “disposable income” over an “applicable commitment period,” and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under Chapter 7.
Translation: you pay what you can afford, not necessarily the full balance.
Looking for ways to manage money better during your repayment period? Building better financial habits now will help you succeed.
Chapter 11 Bankruptcy: The Business Reorganization
Not Just for Big Corporations
When you hear “Chapter 11,” you might think of airlines or retail chains making headlines. And yeah, those happen. Chapter 11 of the Bankruptcy Code generally provides for reorganization, usually involving a corporation or partnership, though people in business or individuals also can seek relief in Chapter 11.
But here’s something most people don’t know: individuals can file Chapter 11 too, especially if their debts exceed Chapter 13 limits.
How It Works
Usually, the debtor remains “in possession,” has the powers and duties of a trustee, may continue to operate its business, and may, with court approval, borrow new money.
The business proposes a reorganization plan. Creditors vote on whether to accept it. If approved by the court, the business operates under the plan’s terms while paying down debt.
Unlike Chapter 7 (which liquidates) or Chapter 13 (which is limited to individuals), Chapter 11 offers flexibility for complex situations. Need to renegotiate long-term business loans? Chapter 11 makes it possible.
The Downside
Filing a Chapter 11 bankruptcy costs $1,738 but keep your checkbook handy, as in complicated cases, legal fees are enough to buy your lawyer a new Rolls-Royce or two.
Yeah, it’s expensive. It’s also time-consuming and complex. That’s why individuals usually explore Chapter 7 or 13 first.
The Specialized Chapters: 9, 12, and 15
Chapter 9: For Municipalities
Cities, towns, and counties can’t file Chapter 7 or 11. They file Chapter 9 instead.
This is rare but makes headlines when it happens—think Detroit’s 2013 bankruptcy. Chapter 9 is designed for municipalities to adjust their debts while continuing to provide essential services.
Unless you’re a mayor, you don’t need to worry about this one.
Chapter 12: For Family Farmers and Fishermen
Got a fishing boat or a family farm? Chapter 12 provides debt relief to family farmers and fishermen with regular annual income.
It works similarly to Chapter 13 but with terms and debt limits tailored to agricultural operations. Most people will never need this chapter.
Chapter 15: For International Cases
Chapter 15 provides a procedure for dealing with cross-border insolvency cases, allowing U.S. courts to cooperate with foreign courts when a debtor has assets in multiple countries.
Unless you have international business dealings or assets abroad, this won’t apply to you.
How to Choose the Right Bankruptcy Type
Here’s a simple decision tree:
Start here: Can you pass the Chapter 7 means test?
Yes, and you don’t mind losing non-exempt assets: Chapter 7 is probably your best bet.
Yes, but you want to keep your house/car: Consider Chapter 13.
No, your income is too high: Chapter 13 is likely your only individual option.
Have a business?
Small business or sole proprietor: Consider Chapter 7 for personal debts or Chapter 11 for reorganization.
Corporation or partnership: Chapter 11 is designed for you.
Special situations?
Farm or fishing operation: Chapter 12
Municipality: Chapter 9
International assets: Chapter 15
Still confused? You’re not alone. This stuff is complicated, which is why talking to a bankruptcy attorney makes sense for most people. Many offer free consultations.
What Bankruptcy Can and Can’t Do
The Good News
Bankruptcy can:
Stop collection calls immediately through the automatic stay
Prevent wage garnishment from most creditors
Stop foreclosure proceedings (at least temporarily)
Eliminate overwhelming unsecured debt
Give you a chance to catch up on secured debt payments
Provide breathing room to reorganize your finances
Want to understand more about how to deal with debt even before considering bankruptcy? Sometimes there are alternatives worth exploring first.
The Reality Check
Bankruptcy can’t:
- Make student loans disappear (except in rare hardship cases)
- Eliminate child support or alimony obligations
- Erase recent tax debt
- Remove debts incurred through fraud
- Magically restore your credit score overnight
Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 stays for 7 years.
But here’s the thing: if you’re already drowning in debt, your credit is probably already damaged. Bankruptcy might actually be the first step toward rebuilding.
The Automatic Stay: Your Superpower
The moment you file bankruptcy—any chapter—something powerful happens. An automatic stay immediately stops most creditor collection actions, including foreclosures, repossessions, collection calls, wage garnishments, and lawsuits.
It’s like hitting pause on financial chaos. Creditors legally must stop bothering you. Collection lawsuits get frozen. Even foreclosure sales can be halted.
This breathing room alone makes bankruptcy worth considering for many people.
Bankruptcy Myths We Need to Kill
Myth #1: “Only irresponsible people file bankruptcy.”
Wrong. Research shows that the sharp rise in individual bankruptcy filings highlights mounting financial pressure on households across the country, often due to medical bills, job loss, or divorce—not reckless spending.
Myth #2: “You’ll lose everything.”
Nope. Exemptions protect most people’s basic property. Many Chapter 7 filers lose nothing at all.
Myth #3: “Your credit is ruined forever.”
It takes a hit, sure. But many people see their credit scores improve within two years post-bankruptcy because they’re no longer drowning in unpayable debt.
Myth #4: “You can’t get credit cards again.”
Actually, secured credit cards are available almost immediately after discharge. You can rebuild credit faster than you think.
Alternatives to Bankruptcy
Before pulling the trigger on bankruptcy, consider whether these might work:
Debt Consolidation
Rolling multiple debts into one payment with a lower interest rate. Learn more about debt consolidation to see if it’s right for you.
Pros: Simpler payments, potentially lower interest
Cons: Requires decent credit, doesn’t reduce total debt owed
Credit Counseling
Working with a counselor to create a debt management plan. Check out credit counseling services for free options.
Pros: Can reduce interest rates and monthly payments
Cons: Takes 3-5 years, not all creditors participate
Debt Settlement
Negotiating with creditors to accept less than you owe. You can even negotiate credit card debt settlement yourself.
Pros: Can significantly reduce total debt
Cons: Damages credit, settled amounts may be taxable income
Simply Paying It Down
Sometimes good old-fashioned budgeting works. Need help? Try zero-based budgeting to gain control of your finances.
The U.S. Courts system provides comprehensive information about bankruptcy basics if you want to dig deeper into the legal details.
The Bottom Line: Finding Your Path Forward
Look, nobody dreams of filing bankruptcy. It’s stressful, it’s scary, and it feels like admitting defeat.
But here’s what I want you to remember: bankruptcy exists for a reason. It’s a legal safety net designed to give people a second chance. Whether it’s Chapter 7’s quick discharge, Chapter 13’s payment plan, or Chapter 11’s business reorganization, there’s probably an option that fits your situation.
The different forms of bankruptcy each serve different purposes. Chapter 7 works best for low-income filers with significant unsecured debt and few assets. Chapter 13 helps people with regular income save their homes and catch up on payments. Chapter 11 provides businesses breathing room to reorganize. And the specialized chapters (9, 12, 15) handle unique situations.
The key is understanding which type matches your specific circumstances—your income, your debts, your assets, and your goals.
Yes, bankruptcy will impact your credit. Yes, it’s public record. Yes, it’s a big decision.
But it’s also sometimes the smartest financial move you can make. It can stop the bleeding, give you breathing room, and let you start rebuilding your financial life.
If you’re considering bankruptcy, talk to a qualified bankruptcy attorney who can review your specific situation. Many offer free consultations. They can help you understand which chapter makes sense for you, what you’ll need to do, and what you can expect.
Remember: filing bankruptcy doesn’t make you a failure. It makes you someone who’s taking control of an impossible situation and making a smart decision to move forward.
Ready to take the next step? Visit Wealthopedia for more financial resources to help you rebuild after bankruptcy or explore other debt relief options.
This article is for informational purposes only and should not be considered legal advice. Bankruptcy laws vary by state and individual circumstances differ. Always consult with a qualified bankruptcy attorney before making any decisions about filing for bankruptcy.
