when debt collectors start blowing up your phone and the bills keep piling higher than your hope, bankruptcy might cross your mind. But here’s the thing: bankruptcy isn’t just one big red button that erases everything. It’s more like a toolbox with different tools for different jobs.
So, what are the different kinds of bankruptcies? The U.S. bankruptcy system offers six main types: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. Each one serves a specific purpose, whether you’re an individual drowning in credit card debt, a small business owner struggling to keep the lights on, or a farmer facing tough seasons.
Understanding which bankruptcy fits your situation can mean the difference between losing everything and getting a genuine fresh start. Let’s break it down without the legal mumbo-jumbo.
The Six Main Types of Bankruptcies in the United States
Before we dive deep, here’s a quick overview of all six bankruptcy chapters:
| Bankruptcy Type | Who It’s For | What It Does | Timeline |
| Chapter 7 | Individuals, businesses | Liquidates assets, eliminates unsecured debts | 3-6 months |
| Chapter 9 | Municipalities | Restructures municipal debt | Varies widely |
| Chapter 11 | Businesses, high-income individuals | Reorganizes debt while continuing operations | 12-18 months+ |
| Chapter 12 | Family farmers and fishermen | Specialized repayment plan for agricultural operations | 3-5 years |
| Chapter 13 | Individuals with regular income | Creates 3-5 year repayment plan | 3-5 years |
| Chapter 15 | International debtors | Coordinates cross-border insolvency cases | Varies |
Now, let’s get into the nitty-gritty of each type.
Chapter 7: The Fresh Start Bankruptcy
Chapter 7 is the most common type of bankruptcy for individuals because it’s relatively quick and can wipe out most unsecured debts in just a few months. Think of it as hitting the reset button on your financial life.
How Chapter 7 Works
When you file Chapter 7, a bankruptcy trustee takes control of your non-exempt assets and sells them to pay off creditors. But here’s the good news: most people don’t lose anything because exemptions protect essential property like your home (up to a certain equity amount), car, basic household goods, and retirement accounts.
After the trustee handles everything, you receive a discharge that eliminates eligible debts. Poof—credit card balances, medical bills, and personal loans vanish.
Who Qualifies for Chapter 7?
Not everyone can file Chapter 7. You’ll need to pass the means test, which compares your income to your state’s median income. If you earn too much, you might be pushed toward Chapter 13 instead. The idea is that if you can afford to pay back some of your debts, you should.
What Debts Can Chapter 7 Eliminate?
Chapter 7 wipes out most unsecured debts:
- Credit card debt
- Medical bills
- Personal loans
- Utility bills
- Some older tax debts
What it doesn’t eliminate:
- Student loans (in most cases)
- Child support and alimony
- Recent tax debts
- Court fines and restitution
- Debts from fraud or illegal activity
For those wondering how to get rid of debt without filing bankruptcy, there are alternatives worth exploring before taking this step.
The Credit Impact
Chapter 7 stays on your credit report for 10 years, which is the longest of all bankruptcy types. However, many people find their credit scores start improving within 12-18 months after discharge, especially if they practice good money management tips.
Chapter 13: The Wage Earner’s Plan
If Chapter 7 is the reset button, Chapter 13 is more like a structured payment plan that lets you catch up on debts while keeping your property. This option is popular among people who want to stop foreclosure or save a car from repossession.
How Chapter 13 Works
Instead of liquidating assets, you propose a 3-5 year repayment plan where you pay back a portion of your debts through monthly payments to a trustee. The amount you pay depends on your income, expenses, and the types of debts you have.
Here’s the beautiful part: you keep all your property—your house, your car, your grandmother’s antique china. As long as you stick to the payment plan, creditors can’t touch it.
Who Should Consider Chapter 13?
Chapter 13 works best if you:
- Have a regular income but fell behind on mortgage or car payments
- Earn too much to qualify for Chapter 7
- Own assets you don’t want to lose
- Have non-dischargeable debts you need time to repay
- Want to protect co-signers from being pursued by creditors
Chapter 13 vs. Chapter 7: The Key Differences
The difference between Chapter 7 and Chapter 13 boils down to this:
Chapter 7 liquidates assets and wipes out most debts within 3-6 months. It’s faster but requires you to give up non-exempt property.
Chapter 13 sets up a 3-5 year repayment plan and allows you to keep all property while catching up on missed payments.
Think of it this way: Chapter 7 is a sprint; Chapter 13 is a marathon. One gets you debt-free faster; the other gives you more control and protection.
Many people dealing with overwhelming obligations explore options like nonprofit debt consolidation before considering bankruptcy.
The Credit Impact
Chapter 13 stays on your credit report for 7 years—three years less than Chapter 7. Plus, because you’re actually repaying debts (even if it’s just a portion), some creditors view it more favorably than a complete discharge.
Chapter 11: Business Reorganization (Not Just for Big Corporations)
When you hear “Chapter 11,” you probably think of massive corporations restructuring billions in debt. And yeah, that happens. But Chapter 11 isn’t only for Fortune 500 companies.
How Chapter 11 Works
Chapter 11 allows businesses to continue operating while reorganizing their debts. The company proposes a reorganization plan that outlines how it will become profitable again and pay creditors over time. Creditors vote on the plan, and if approved, the business emerges from bankruptcy with a cleaner balance sheet.
Who Uses Chapter 11?
Most businesses use Chapter 11 to restructure and keep operating. This includes:
- Small and medium-sized businesses
- Sole proprietorships
- Partnerships
- Corporations
But here’s what many people don’t know: individuals with very high debt limits can also file Chapter 11. There’s even a streamlined version called Subchapter V designed specifically for small businesses with debts under $7.5 million.
If you’re a business owner considering your options, understanding long-term business loans might also provide alternatives to bankruptcy.
Why Not Just File Chapter 7?
Chapter 7 means shutting down the business and selling everything. Chapter 11 means staying open, keeping employees working, and giving the business a chance to recover. For business owners who’ve poured their hearts into their companies, that distinction matters enormously.
Chapter 9: Municipal Bankruptcy
This one’s for the cities and towns, not individuals. Chapter 9 allows municipalities to restructure their debts when they can’t pay their bills.
Who Can File Chapter 9?
Only government entities like:
- Cities
- Towns
- Counties
- School districts
- Public utilities
Famous examples include Detroit (2013) and several California cities during the financial crisis. These cases are rare but significant because they affect thousands of residents.
How It’s Different
Unlike other bankruptcies, Chapter 9 has unique features:
- No liquidation of assets (you can’t sell city hall)
- State authorization is typically required
- More limited court intervention
- Focus on negotiating with creditors (especially public employee unions and bondholders)
Chapter 12: Family Farmer and Fisherman Bankruptcy
Agriculture and fishing are incredibly unpredictable industries. One bad season, and years of hard work can crumble. That’s why Chapter 12 exists as a specialized repayment plan for agricultural operations.
Who Qualifies?
Chapter 12 is designed for:
- Family farmers with regular annual income
- Family fishermen with regular annual income
- Partnerships and corporations where more than 50% is owned by a single family
There are debt limits, and most of the debt must come from farming or fishing operations.
How Chapter 12 Works
Similar to Chapter 13, debtors propose a 3-5 year repayment plan. However, Chapter 12 has more flexible rules that account for the seasonal nature of farming and fishing income. Payments can fluctuate based on harvest times or fishing seasons.
This chapter recognizes that farmers might have significant assets (land, equipment) but irregular cash flow—a situation that doesn’t fit neatly into other bankruptcy types.
Chapter 15: International Bankruptcy Cases
In our globalized economy, businesses often operate across borders. Chapter 15 handles cases involving international debtors with assets in multiple countries.
What Chapter 15 Does
Chapter 15 provides a framework for:
- Coordinating bankruptcy proceedings between the U.S. and foreign countries
- Protecting debtors’ assets in the U.S. while a foreign bankruptcy proceeds
- Facilitating cooperation between U.S. and foreign courts and trustees
This is the most specialized bankruptcy chapter and rarely affects individual consumers. It’s primarily a tool for international businesses and their creditors.
How to Choose the Right Bankruptcy Chapter
So you know what are the different kinds of bankruptcies, but which one is right for you? Here’s a practical guide:
Choose Chapter 7 if:
- You have little to no non-exempt assets
- Your income is below your state’s median
- You need a quick resolution (3-6 months)
- Most of your debt is unsecured (credit cards, medical bills)
Choose Chapter 13 if:
- You’re facing foreclosure and want to save your home
- You have regular income
- You failed the Chapter 7 means test
- You have valuable assets you want to protect
- You have non-dischargeable debts you need time to repay
Choose Chapter 11 if:
- You own a business that’s viable but struggling
- Your debts exceed Chapter 13 limits
- You need to renegotiate commercial leases or contracts
For farmers and fishermen: Chapter 12 offers specialized protections for agricultural operations.
If you’re juggling multiple debts, you might also want to research credit card debt consolidation as a potential alternative.
Frequently Asked Questions
How many types of bankruptcies are there in the U.S.?
There are six main types: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. Each serves a specific purpose and audience.
What is the most common type of bankruptcy for individuals?
Chapter 7 is the most common because it eliminates unsecured debts quickly—usually within 3-6 months—making it ideal for people with overwhelming credit card or medical debt.
Can businesses file for bankruptcy?
Absolutely. Businesses typically use Chapter 11 to restructure debt and continue operations, though they can also file Chapter 7 to liquidate assets and close permanently.
Does filing bankruptcy mean I lose everything?
No. Many assets are protected under exemptions. In Chapter 7, you keep exempt property like your home (up to a certain equity), car, household goods, and retirement accounts. In Chapter 13, you keep all property as long as you complete your repayment plan.
How long does bankruptcy stay on my credit report?
Chapter 7 stays for 10 years, and Chapter 13 stays for 7 years. However, the impact lessens over time, especially if you rebuild credit responsibly.
Do I need a lawyer to file bankruptcy?
Legally, no—you can file without an attorney. But bankruptcy is complex, with strict rules and deadlines. Most individuals benefit from hiring a bankruptcy attorney who can navigate the process, protect your rights, and ensure you choose the right chapter.
Is Chapter 11 only for big companies?
Not at all. While major corporations use Chapter 11, small businesses and even individuals with very high debt can file. Subchapter V provides a streamlined version specifically for small businesses.
Which bankruptcy helps stop foreclosure?
Chapter 13 is designed to help you catch up on mortgage payments and prevent home loss. When you file, the automatic stay immediately halts foreclosure proceedings, giving you time to propose a repayment plan.
Can I choose which bankruptcy chapter to file?
You can choose, but eligibility tests (like the Chapter 7 means test) and your financial situation determine which chapters you qualify for. An attorney can help you understand your options.
What debts can’t be eliminated in bankruptcy?
Certain debts survive bankruptcy, including:
- Student loans (with rare exceptions)
- Child support and alimony
- Recent taxes
- Court-ordered fines and restitution
- Debts from fraud or willful injury
Understanding what is payoff amount for your various debts can help you assess which obligations might be dischargeable.
The Automatic Stay: Your Immediate Protection
The moment you file any bankruptcy chapter, something powerful happens: the automatic stay kicks in. This legal shield immediately stops most collection activities:
- Creditor phone calls cease
- Wage garnishments halt
- Foreclosure proceedings pause
- Repossession attempts stop
- Lawsuits freeze
The automatic stay gives you breathing room to reorganize your finances without constant harassment. It’s one of the most immediate benefits of filing bankruptcy.
However, the stay isn’t permanent or absolute. Creditors can ask the court to lift it in certain situations, and some obligations (like child support) aren’t affected.
What Happens After You File?
Here’s what the bankruptcy process typically looks like:
- File Your Petition You submit your bankruptcy petition along with detailed financial schedules listing all assets, debts, income, and expenses.
- The 341 Meeting of Creditors About a month after filing, you attend a meeting where the trustee asks questions about your finances under oath. Despite the name, creditors rarely show up.
- Trustee Administration In Chapter 7, the trustee liquidates non-exempt assets. In Chapter 13, they collect and distribute your monthly payments.
- Resolution Chapter 7 cases typically end with a discharge after 3-6 months. Chapter 13 cases conclude when you complete your 3-5 year repayment plan.
Protecting Your Assets: Understanding Exemptions
One of the biggest myths about bankruptcy is that you lose everything. The truth? Exemptions protect most people’s essential property.
Federal and state exemptions typically cover:
- Your home (homestead exemption, usually $15,000-$100,000+ in equity)
- One vehicle (usually $3,000-$5,000 in equity)
- Household goods and furniture
- Tools of your trade
- Retirement accounts (usually unlimited)
- Public benefits and Social Security
- Life insurance policies
Every state has different exemption amounts, and some states let you choose between state or federal exemptions. This is where an attorney becomes invaluable—they know exactly how to maximize your exemptions.
Alternatives to Bankruptcy
Before filing bankruptcy, consider whether these alternatives might work:
Debt consolidation: Combine multiple debts into one payment with a lower interest rate. Check out options like debt relief programs that might help.
Credit counseling: Work with a certified counselor to create a debt management plan. Many people find success with best free credit counseling services.
Debt settlement: Negotiate with creditors to pay less than you owe. Learn how to negotiate credit card debt settlement yourself.
Budget restructuring: Sometimes, aggressive budgeting and increased income can solve the problem without legal intervention.
The question many people ask is: should I pay off debt or invest? The answer depends on your interest rates, financial goals, and overall situation.
The Real Cost of Bankruptcy
Let’s talk money. How much does bankruptcy actually cost?
Chapter 7 filing fee: $338
Attorney fees: $1,000-$3,500 on average
Chapter 13 filing fee: $313
Attorney fees: $3,000-$6,000 on average (often paid through the repayment plan)
Chapter 11 costs: Significantly higher—often $10,000-$100,000+ depending on case complexity
Yes, it costs money to declare bankruptcy. The irony isn’t lost on anyone. However, many attorneys offer payment plans, and in Chapter 13, attorney fees can be built into your repayment plan.
Life After Bankruptcy: Rebuilding Your Financial Future
Bankruptcy isn’t the end of your financial story—it’s a new chapter (pun intended). Here’s what life looks like after discharge:
Immediate relief: No more collection calls, lawsuits, or garnishments. The stress that kept you up at night? Gone.
Credit rebuilding: Your credit score takes a hit, but most people see improvement within 12-24 months with responsible behavior. Secured credit cards, on-time rent payments, and installment loans help rebuild credit.
New financial habits: Bankruptcy forces you to examine what went wrong. Many people emerge with better budgeting skills, emergency fund strategies, and creative money-saving tips.
Future borrowing: You can qualify for mortgages as soon as 2 years after Chapter 7 discharge (with FHA loans) or 4 years for conventional loans. Car loans are available even sooner.
Starting fresh: The psychological relief of eliminating overwhelming debt is immeasurable. You can finally breathe and plan for the future.
Common Bankruptcy Mistakes to Avoid
Don’t sabotage your bankruptcy case. Avoid these common errors:
- Hiding assets: The bankruptcy system demands full honesty. Hiding assets is fraud and can result in criminal charges, not just case dismissal.
- Running up debts before filing: Courts scrutinize recent charges, especially luxury purchases or cash advances. These debts might not be discharged.
- Paying back friends and family: Preferential payments to insiders can be reversed by the trustee, meaning your family might have to return the money.
- Failing to complete credit counseling: Mandatory pre-filing counseling and post-filing education must be completed from approved providers.
- Not following court orders: Missing deadlines, failing to appear at the 341 meeting, or not making Chapter 13 payments can get your case dismissed.
Should You File Bankruptcy? A Final Reality Check
Bankruptcy is a serious decision with long-lasting consequences. It’s not right for everyone, and it’s definitely not something to enter lightly.
Consider bankruptcy if:
- You’re drowning in debt with no realistic way to repay it
- You’re facing foreclosure, repossession, or wage garnishment
- Debt stress is affecting your health and relationships
- You’ve exhausted other options like debt consolidation or negotiation
- You can benefit from the automatic stay and discharge
Avoid bankruptcy if:
- You can realistically pay off debts within 3-5 years
- Your main debts are non-dischargeable (student loans, child support)
- You recently took on significant debt
- You’re facing criminal charges related to fraud
- You want to protect a co-signer (Chapter 7 doesn’t shield them)
Still wondering about your situation? Consider consulting with a financial advisor for debt who can provide personalized guidance.
Take Action: Your Next Steps
If you’re seriously considering bankruptcy, here’s what to do:
- Gather your financial documents: List all assets, debts, income, and expenses. You’ll need this information for any bankruptcy filing.
- Take the required credit counseling course: You must complete this within 180 days before filing. Find an approved provider on the U.S. Trustee’s website.
- Consult with a bankruptcy attorney: Most offer free initial consultations where they’ll evaluate your situation and recommend the best chapter.
- Understand your state’s exemptions: Research what property you can keep in your state.
- Make an informed decision: Weigh bankruptcy against alternatives. Consider both immediate relief and long-term consequences.
Remember, knowledge is power. Now that you understand what are the different kinds of bankruptcies, you can make an informed decision about your financial future.
The Bottom Line
Bankruptcy isn’t a sign of failure—it’s a legal tool designed to give honest people a fresh start when circumstances overwhelm them. Whether it’s Chapter 7’s quick discharge, Chapter 13’s structured repayment, or Chapter 11’s business reorganization, the U.S. bankruptcy system offers solutions for different situations.
The six bankruptcy types—Chapter 7, 9, 11, 12, 13, and 15—serve distinct purposes, from individual debt relief to municipal restructuring to international coordination. Understanding which one fits your situation is the first step toward reclaiming your financial life.
The most important takeaway? You have options. Bankruptcy isn’t your only path forward, but when it is the right choice, it can offer genuine relief and a realistic path to financial stability.
Don’t let fear or shame prevent you from exploring your options. Talk to professionals, understand your choices, and make the decision that’s right for your unique situation. Your financial future starts with the actions you take today.
For more comprehensive guidance on managing your finances and exploring all your options, visit Wealthopedia.
