Types of Bankruptcy: Which Chapter Is Right for Your Situation?
Chapter 7 and Chapter 13 handle most personal bankruptcies, with Chapter 7 eliminating debts quickly and Chapter 13 offering repayment plans to protect assets. Your income, assets, and financial goals determine which chapter works best for your situation.
Get Free ConsultationYou have options when debt feels overwhelming. Six different bankruptcy chapters exist under U.S. law. Each serves a specific purpose for individuals, businesses, or municipalities.
Chapter 7 and Chapter 13 handle most personal bankruptcy cases. Chapter 7 eliminates most debts without requiring repayment. Chapter 13 creates a manageable repayment plan over three to five years.
Find Out Which Bankruptcy Chapter You Qualify For
Stop guessing about Chapter 7 or Chapter 13. Get a free consultation to understand your options and start your path to debt freedom today.
Check Your EligibilityThe other chapters serve specialized needs. Businesses use Chapter 11 to reorganize. Farmers and fishermen use Chapter 12. Municipalities use Chapter 9. Chapter 15 handles international bankruptcy issues.
What Is Bankruptcy?
Bankruptcy provides legal debt relief under federal law. The system gives you protection from creditors while resolving financial problems.
Each bankruptcy type comes from a specific section of the U.S. Bankruptcy Code. People call them “chapters” because of this structure. Federal bankruptcy courts handle all cases using the same basic rules nationwide.
The right chapter depends on your income, assets, and debt type. Most people file either Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy: Fast Debt Relief
Chapter 7 eliminates credit card debt, medical bills, and other unsecured debts. You can get a fresh financial start in four to six months.
You must pass the means test to qualify. The test proves you lack sufficient income to repay your debts. Speak with a bankruptcy attorney for free to determine if you qualify.
How Chapter 7 Works
Chapter 7 is called “liquidation bankruptcy.” You might need to sell non-exempt property to pay creditors.
But here’s good news: 96% of filers keep all their belongings. Exemptions protect most basic assets like household goods, clothing, and often a modest vehicle.
Most cases finish in four to six months. You typically receive your discharge order three to four months after filing. Your debts disappear when the court issues the discharge.
Chapter 7 stays on your credit report for 10 years. Many filers see credit score improvements within two years. You can start rebuilding credit immediately after discharge.
Chapter 13 Bankruptcy: Keep Your Assets
Chapter 13 helps you reorganize debts through a court-approved repayment plan. You keep your property while catching up on missed payments.
The repayment plan lasts three to five years based on your income. You pay what you can afford each month to a bankruptcy trustee. The trustee distributes payments to your creditors.
Remaining unsecured debts get discharged after you complete the plan. Chapter 13 stays on your credit report for seven years.
When Chapter 13 Makes Sense
Chapter 13 works well if you want to save your home from foreclosure. You can catch up on mortgage arrears through your repayment plan.
People also choose Chapter 13 when they earn too much for Chapter 7. Others use it to protect valuable non-exempt assets from liquidation.
Chapter 13 lets you restructure car loans at lower interest rates. You can also repay non-dischargeable debts like child support or alimony through manageable monthly payments.
Your debt must fall below specific limits to qualify. Both secured and unsecured debt counts toward these limits.
Chapter 7 vs Chapter 13: Key Differences
Understanding the differences helps you choose the right option. Here’s how they compare:
Eligibility Requirements
Chapter 7 requires passing the means test. You must show limited income and few valuable assets.
Chapter 13 requires steady income to fund your repayment plan. You must stay under the debt limits for both secured and unsecured obligations.
Timeline Differences
Chapter 7 moves quickly. Most cases complete in four to six months from filing to discharge.
Chapter 13 takes much longer. You must complete a three to five year repayment plan before receiving your discharge.
Debt Handling
Both chapters eliminate unsecured debts like credit cards and medical bills. Chapter 13 also helps you catch up on secured debt payments.
Chapter 7 doesn’t give you time to catch up on mortgage or car loan arrears. Your lender can still foreclose or repossess during bankruptcy.
Asset Protection
Chapter 7 may require selling non-exempt property. Exemptions protect most basic assets for typical filers.
Chapter 13 lets you keep all property, including non-exempt assets. You must pay creditors an amount equal to what they would receive in Chapter 7.
Business and Specialty Bankruptcies
Four other bankruptcy chapters serve specialized purposes. Most individuals never use these options.
Chapter 11: Business Reorganization
Businesses use Chapter 11 to restructure debt while continuing operations. Individuals rarely file Chapter 11 due to high costs.
Filing fees exceed $1,700. Attorney fees typically start around $15,000. High-income individuals who exceed Chapter 13 debt limits sometimes use Chapter 11.
Chapter 11 takes months or years to complete. You must create and implement a complex reorganization plan. Creditors vote on your proposed plan.
About 91% of Chapter 11 filings come from businesses, not individuals.
Chapter 11 vs Chapter 7
Chapter 7 liquidates assets and eliminates debts quickly. Chapter 11 restructures debts while preserving business operations.
Chapter 7 costs less and moves faster. Chapter 11 offers more flexibility but requires significant resources.
Businesses choose Chapter 11 when they can return to profitability. Chapter 7 makes sense when closing the business is the best option.
Chapter 12: Family Farmers and Fishermen
Chapter 12 serves family farmers and commercial fishing operations. It works like Chapter 13 but addresses agricultural business needs.
The repayment plan accounts for seasonal income fluctuations. You receive a discharge after completing the plan.
Chapter 9: Municipal Bankruptcy
Cities, towns, counties, and school districts use Chapter 9. Municipal utilities and taxing districts also qualify.
Chapter 9 helps municipalities restructure financial obligations. The process resembles Chapter 13 reorganization but applies to governmental entities.
States cannot file Chapter 9. Congress passed special legislation in 2016 to let Puerto Rico access bankruptcy protection.
Chapter 15: Cross-Border Cases
Chapter 15 handles international bankruptcy situations. It applies when someone files bankruptcy abroad but has assets in the United States.
The chapter promotes cooperation between U.S. and foreign bankruptcy courts. It provides an effective framework for cross-border insolvency cases.
Choosing Your Bankruptcy Chapter
Your financial situation determines the best bankruptcy option. Consider your income, assets, and debt types.
Chapter 7 works best for people with limited income and few assets. You get quick debt relief and a fresh start in months.
Chapter 13 suits people with steady income who want to protect assets. You can save your home from foreclosure while repaying what you can afford.
Most people benefit from professional guidance. Speak with a bankruptcy attorney for free to explore your options and determine which chapter fits your situation.
Bankruptcy exists to help people overcome financial hardship. Using these laws for their intended purpose carries no shame. You deserve a fresh financial start.