The Two Most Common Types of Personal Bankruptcy
If you're considering bankruptcy, you've likely come across the terms Chapter 7 and Chapter 13. These are the two most common types of personal bankruptcy in the United States, and they work in fundamentally different ways. Choosing between them depends on your income, assets, and long-term financial goals.
What Is Chapter 7 Bankruptcy?
Chapter 7 is often called "liquidation bankruptcy." A court-appointed trustee reviews your assets and may sell non-exempt property to repay creditors. In exchange, most of your remaining unsecured debts — credit cards, medical bills, personal loans — are discharged (legally eliminated) at the end of the process.
Key features of Chapter 7:
- Typically completes in 3 to 6 months
- Eliminates most unsecured debts entirely
- You must pass a means test (your income must be below your state's median or your disposable income must be limited)
- Certain property may be protected by state and federal exemptions (home equity, vehicle, retirement accounts)
- Does not stop foreclosure long-term or allow you to catch up on missed mortgage payments
What Is Chapter 13 Bankruptcy?
Chapter 13 is called a "reorganization" or "wage earner's plan." Instead of liquidating assets, you propose a 3 to 5 year repayment plan to pay back some or all of your debts. At the end of the plan, remaining eligible debts may be discharged.
Key features of Chapter 13:
- You keep your assets — including your home and car
- Allows you to catch up on mortgage arrears and stop foreclosure
- Requires a stable, regular income
- More complex and longer process than Chapter 7
- Debt limits apply — very large debts may disqualify you
Comparing Chapter 7 and Chapter 13
| Factor | Chapter 7 | Chapter 13 |
|---|---|---|
| Duration | 3–6 months | 3–5 years |
| Income requirement | Must pass means test | Must have regular income |
| Asset protection | Exemptions only | Keep most assets |
| Stops foreclosure? | Temporarily only | Yes, if you follow the plan |
| Credit report impact | 10 years | 7 years |
| Best for | Few assets, low income | Regular income, home to save |
What Bankruptcy Cannot Eliminate
It's important to understand that bankruptcy does not discharge every type of debt. Generally non-dischargeable debts include:
- Student loans (with very rare exceptions)
- Child support and alimony
- Most tax debts
- Debts from fraud or criminal activity
Should You File for Bankruptcy?
Bankruptcy is a legal tool — not a moral failure. For people in genuine financial distress, it can provide a lawful fresh start. However, it is a significant step with lasting consequences. Before filing, consult with a qualified bankruptcy attorney who can assess your specific situation, explain what to expect, and help you determine whether another debt relief option might serve you better.