What are the different types of bankruptcy

what are the different types of bankruptcy

Bankruptcy is not an eventuality that anybody hopes for. That being said, there are circumstances in which bankruptcy is the best or only option available. Though bankruptcy is something to be avoided if at all possible, it is a necessary mechanism in the American economic system. According to statistics released by the Administrative Office of the U.S. Courts, annual bankruptcy filings totaled 418,724 in the year ending June 2023.1

Bankruptcy filings can bring relief to individuals and businesses while providing unsecured creditors debt repayment that may have been otherwise written off. 

If you are currently considering filing for bankruptcy for debt relief, it’d be wise to familiarize yourself with bankruptcy law. We will catch you up on the basics of bankruptcy so you can be sure it is the right choice and which type of bankruptcy is best for you. 

What Is Bankruptcy?

The bankruptcy process allows millions of individuals and businesses a fresh start from the burden of unsecured debt. People and corporations declare bankruptcy when they are unable to repay the outstanding debt. The bankruptcy code either discharges those debts, liquidates assets to pay them, or reorganizes them into an affordable repayment plan. 

Bankruptcy laws give relief to borrowers while still making it possible for some creditors to receive payment for unsecured debts. The way a bankruptcy case proceeds depends on the type of bankruptcy filed. There are varying types of bankruptcy for individuals and businesses. 

When Should You File For Bankruptcy?

Bankruptcy should be a last resort option when you have too much debt to repay. While personal bankruptcy is a helpful mechanism in the economy, it should only be relied upon when all other 

options have been exhausted. 

Bankruptcy can bring immense relief to those who are drowning in debt. However, it will bring with it many negative consequences and will remain on your credit report for seven to ten years after you’ve gone to bankruptcy court. Because of this, bankruptcy can impact your applications for a new job or a new apartment.

If you have a significant amount of unsecured debt and have done everything you can to pay it off, it might be a good time to start considering bankruptcy. 

What Are The Different Bankruptcy Chapters?

The United States Bankruptcy Code provides a total of six different bankruptcy chapters for individuals and businesses. The bankruptcy code has other processes for each chapter of bankruptcy according to whether the filer is an individual or a business. 

There are also differences depending on the current monthly income and assets available for liquidation. 

Some types of bankruptcies feature partial discharge of debts, while others offer a reorganization plan depending on the debtor’s ability to pay. Here is a brief overview of the bankruptcy basics of each chapter:

Chapter 7: Liquidation

Chapter 7 bankruptcy is known as the liquidation bankruptcy. In Chapter 7, liquidation bankruptcy, a court-appointed trustee sees to the liquidation of your assets to pay off your creditors. All remaining debt is discharged (i.e., erased) with a few exceptions.

Chapter 13: Repayment Plan

Rather than discharging your debt, Chapter 13 bankruptcy reorganizes your debt so that it is easier for you to repay. The bankruptcy court sets up a repayment plan for paying creditors at least a portion of what you owe in unsecured debt. The monthly payment you are assigned depends on what you can afford with your monthly income.

Chapter 11: Large Reorganization

Chapter 11 bankruptcy is used to reorganize debts owed by a business or corporation; this way, it is a form of bankruptcy protection. The business owner will typically devise a way to continue operating as this type of bankruptcy is settled. The only instances where an individual may file for Chapter 11 bankruptcy are some real estate investors or pro-athletes who may have too much debt to qualify for Chapter 13. 

Chapter 12: Family Farmers

Chapter 12 is specifically designed for family farmers and fishing operations. This type of bankruptcy allows them to pay off their debts with a payment plan without having to sell their assets or foreclose on the property necessary for their livelihood. 

Chapter 15: Used in Foreign Cases

Chapter 15 of the bankruptcy code is strictly used in international bankruptcy proceedings for foreign debtors with creditors in more than one country. 

Chapter 9: Municipalities 

Chapter 9 bankruptcy allows a repayment plan for towns, cities, and school districts to pay back creditors through the bankruptcy courts. 

Personal Bankruptcy Chapters

As an individual, you are likely to file for one of the personal bankruptcies: Chapter 7 or Chapter 13. These two types of bankruptcy will cover the needs of all individual filers with only very rare exceptions. 

By getting a deeper understanding of each of these chapters, you will be able to determine which one suits your personal finance situation best. 

A Deeper Look At Chapter 7 Bankruptcy

As mentioned above, Chapter 7 bankruptcy is known as the liquidation bankruptcy. A court-appointed trustee is in charge of selling your nonexempt assets to pay off unsecured debts like credit card debt and medical bills. These nonexempt assets might look like valuable family heirlooms, investments, secondary properties, etc. 

Individuals who do not have valuable assets that can be sold to pay creditors may have all their unsecured debt discharged without having to sell anything. However, there are several types of debts that cannot be forgiven through bankruptcy. The most notable are student loans and tax debt. 

You are only permitted to file for Chapter 7 bankruptcy if the bankruptcy court decides through a means test that you do not have enough disposable income to repay your debt. If you have a limited income compared to your state’s average regular income, you may qualify for Chapter 7 bankruptcy. This type of bankruptcy will stay on your credit report for up to 10 years. 

More Information On Chapter 13 Bankruptcy

Chapter 13 bankruptcy is focused on reorganizing your debts so that they can be at least partially paid off through a structured repayment plan. With Chapter 13 bankruptcy, you can keep your valuable assets instead of having a bankruptcy trustee sell them to pay your debt. This would be much more favorable to individuals with investments and personal property they don’t want to part with. 

Chapter 13 bankruptcy has been given the nickname of the wage earner’s plan as it sets up a monthly payment that works with your income. Anyone can qualify for Chapter 13 without a means test like the one required by Chapter 7 as long as your debt does not exceed a certain amount.  

The repayment plans for debt relief through Chapter 13 typically span three to five years. Under some circumstances, Chapter 13 might be used by small businesses with a consistent income as well as individuals. This type of bankruptcy will remain on your credit report for seven years. 

Alternatives To Filing For Bankruptcy 

If you are still unsure whether bankruptcy is the right choice for you, we recommend considering all your options and alternatives before making a firm decision. Personal finance experts advise that bankruptcy should be the last resort option as it can have long-lasting effects on various aspects of your life.

These are a couple of the alternatives you should consider before filing for bankruptcy. If there is any way for you to handle your outstanding debts without bankruptcy, then you should attempt them first. 

Re-Analyze Your Financial Situation

Before making any rash decisions, take a moment to analyze the overall situation. Figure out how much you actually owe, including medical bills, installment loans, credit card debt, quick cash loans, personal loans, and secured debt. Next, figure out how much income you bring in consistently and what you can afford to pay each month on your debt. 

A Needs-Based Budget

To increase your ability to pay off your debt, strip down your budget to necessities only. Cut out anything that you don’t need right now, even if you have to make some temporary sacrifices. Once your budget is entirely needs-based, see how much money you can put toward debt repayment each month. 

Sell Your Assets

Instead of filing for bankruptcy to have your assets sold off to pay your secured debt, sell your things on your own to pay off your debt. If the circumstances are dire enough for bankruptcy, then you might be able to sell your assets to pay your creditors without having to deal with the derogatory mark of bankruptcy on your credit in the first place.

Increase Your Income

You can boost the amount of money you can put towards debt repayment by increasing your monthly cash flow. If you are not up for a salary raise at work, this might mean working a second job or putting in some overtime hours. This is obviously not ideal, but a few months of hard work and long days could make it possible for you to avoid bankruptcy. 

Get On a Repayment Plan

Using a debt pay-off strategy is one of the best ways to stay organized and focused on your journey to financial freedom. You can use the debt snowball method or the debt avalanche method to keep on track and motivated through your repayment efforts. 

CreditNinja’s Final Thoughts On Bankruptcy

If you do come to the conclusion that bankruptcy is the only way forward to debt relief, CreditNinja urges you to read up on bankruptcy laws. This way, you aren’t caught off guard and can be appropriately prepared for anything that might come your way. A bankruptcy attorney can help you through this process.


  1. Bankruptcy Filings Rise 10 Percent | United States Courts
  2. What Are the Different Types of Bankruptcies? |
  3. Types of Bankruptcies: Which One Is Right For You? | Forbes Advisor
  4. Every Type of Bankruptcy Explained | Upsolve

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