The Two Kinds of Bankruptcy Most Consumers Use
This website focuses on the two most common types of bankruptcy filed by individuals: Chapter 7 and Chapter 13. But here’s a quick summary of the six types of bankruptcy most commonly filed under the bankruptcy code; they get their names from the chapters where they appear in the code.
Chapter 7 Bankruptcy
- Chapter 7 lets individuals wipe out (“discharge”) most kinds of debt in just a few months.
- You get to keep certain kinds of property—for example, at least some of the equity in your home, your car, clothing, personal items, and property that is essential to your profession. This type of property is called “exempt” property, and many Chapter 7 filers find that exemptions cover most of what they own.
- If you have nonexempt property, the bankruptcy trustee will sell it to repay your creditors as much as possible.
- To qualify for Chapter 7, you must pass the “means test,” showing that your income is less than the state median income for your family size.
- Most bankruptcies filed in the U.S. are Chapter 7 bankruptcies. (For more information, see How Chapter 7 Bankruptcy Works.)
Chapter 13 Bankruptcy
- Under Chapter 13, an individual repays some or all of their debts under a payment plan approved by the bankruptcy court.
- Chapter 13 bankruptcy takes three to five years to complete.
- Those who choose Chapter 13 usually do so because they want to protect certain kinds of non-exempt property or because they have too much income to qualify for Chapter 7. (Most people prefer to file for Chapter 7 if they qualify, because Chapter 7 allows you to erase most kinds of debt in just three to six months.)
- You can qualify for Chapter 13 if you have steady income and your debts don’t exceed the limits set by the bankruptcy code. (For more information, see How Chapter 13 Bankruptcy Works.)
Less Common Types of Bankruptcy
Chapter 9 Bankruptcy
Cities or towns may file for Chapter 9 bankruptcy if they are overwhelmed by debt. It allows municipalities to develop a plan for handling debts while holding creditors at bay.
Chapter 11 Bankruptcy
- Chapter 11, often called “reorganization bankruptcy” is usually used by businesses.
- It allows a business to work out a court-supervised plan to pay back creditors while keeping its doors open. We mostly hear about big businesses filing for Chapter 11, but small businesses or even individuals can use it, too.
- The trouble is that Chapter 11 is usually too expensive for smaller undertakings and anyone other than the most wealthy individuals, because it entails lots of meetings, court hearings, and big bills from bankruptcy lawyers.
Chapter 12 Bankruptcy
- This type of bankruptcy is a lot like Chapter 13 except it’s available only for family farmers and fishermen.
- It’s specially designed to help farmers and fishermen keep their livelihoods while paying off debts under a court-approved plan.
- Chapter 12 has a higher debt threshold and more options to protect property than Chapter 13.
Chapter 15 Bankruptcy
- Chapter 15 is for people or organizations that have debts and property in the United States and another country.
- Under this chapter, federal bankruptcy courts can more easily limit their involvement in the case to just the property and people in the United States.