Considering bankruptcy can feel stressful and overwhelming. But when debt becomes unmanageable, understanding your options can mean the difference between drowning and getting a financial life raft. Bankruptcy is a structured, legal tool designed to help you regain control of your finances.
The tricky thing about bankruptcy is that there are many types of bankruptcy to choose from. Choosing the right one can affect everything from how much debt you shed to whether you can keep your home. In this article, we’ll break down the most common types of bankruptcies, what they actually mean, and how to figure out which option makes the most sense for your situation.
Why Does the Type of Bankruptcy I Choose Matter?
Bankruptcy isn’t a one-size-fits-all solution. The type of bankruptcy you file can determine everything from how much debt gets discharged to whether you can keep your car or home. It can also affect how long the process takes, the impact on your credit, and what your financial life looks like afterward.
Everyone’s financial situation is different, so there are different types of bankruptcies to choose from based on your situation. Still, filing the wrong type could mean missing out on perks and protections you’re eligible for, or signing up for a payment plan that doesn’t fit your income.
3 Most Common Types of Bankruptcies—and What They Mean for You
When people hear the word “bankruptcy,” they often think it’s a single process. In reality, there are several types of bankruptcies, each designed for different financial situations.
Chapter 7
Chapter 7 is the most common type of bankruptcy. It’s often called “liquidation” because non-exempt assets (if you have any) are sold off to repay creditors.
Filing for Chapter 7 is like pushing a financial reset button. Most of your unsecured debts are wiped out in a matter of months. You may need to give up some property, but many essentials—like your home, car, or retirement savings—are often protected under exemption rules.
To file for Chapter 7, you’ll need to pass the “means test,” which looks at your income, expenses, and ability to repay debts. If your income is below your state’s median or you can’t cover even basic expenses, you might qualify. It’s typically used by individuals with limited income and high unsecured debt (like credit cards and medical bills).
Chapter 13
Chapter 13 is a type of bankruptcy designed for people with a steady income but who need help restructuring their debts. Instead of wiping everything clean right away, it sets up a court-approved repayment plan, usually over three to five years, to pay back some or all of your debt.
Think of Chapter 13 as hitting the “pause and reorganize” button. You’ll work with the court to create a manageable repayment plan based on your income and expenses. In return, you get to keep your stuff, like your house or car, and creditors have to back off. It’s one of the most flexible types of bankruptcies because it gives you room to catch up without starting from scratch.
Chapter 11
Chapter 11 is a type of bankruptcy that allows businesses—and sometimes individuals—to reorganize their debts while continuing to operate. Unlike Chapter 7 (where things shut down) or Chapter 13 (which follows a strict payment plan), Chapter 11 gives you more control and flexibility to restructure your finances under court supervision.
You likely don’t need to worry about Chapter 11 unless you own a business, partnership, LLC, or corporation. However, if that does apply to you, this option can provide some breathing room to renegotiate contracts, reduce debt, and chart a sustainable path forward.
| Type | Who It’s For | Main Goal | Key Features | Duration |
| Chapter 7 | Individuals with low income and high debt | Liquidation and fast debt discharge | Sells non-exempt assets to pay creditors; most unsecured debt wiped clean | 3–6 months |
| Chapter 13 | Individuals with steady income | Debt reorganization and asset protection | Court-approved repayment plan (3–5 years); keep your assets | 3–5 years |
| Chapter 11 | Businesses and high-debt individuals | Business or personal restructuring | Allows continued operations while restructuring debt obligations | Months to several years |
How To Choose the Type of Bankruptcy for Your Situation
Chances are, you’ll likely file for either Chapter 7 or Chapter 13 bankruptcy as an everyday consumer. Consider these factors to choose which type of bankruptcy to file for:
- Income: Do you have steady income, or are you struggling to cover basic expenses?
- Debt type: Are your debts mostly unsecured (like credit cards) or secured (like a mortgage or car loan)?
- Asset mix: Do you own property or valuable assets that you want to keep?
- Future goals: Are you aiming for a fast exit or long-term reorganization? Planning to keep a business running?
Of course, a guide like this can’t decide for you. When in doubt, consult with an attorney to choose the proper bankruptcy filing. It requires a little extra upfront effort, but personalized advice could help protect you from losing your house, car, and other assets.
Your Financial Comeback Starts Here
If you’re considering bankruptcy, it can provide some much-needed relief from the stress of debt. This legal tool helps you get back on your feet, provided you file the right paperwork.
Understanding the different types of bankruptcies empowers you to make informed choices that align with your financial reality and future goals. Whether it’s a clean slate with Chapter 7, a structured comeback through Chapter 13, or a full business reboot via Chapter 11, there’s a path forward that fits your situation.
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