What Are the Different Types of Bankruptcy?

There are six types of bankruptcy under the U.S. Bankruptcy Code, but most people only need to know about two. Chapter 7 eliminates most unsecured debts in three to six months, while Chapter 13 lets you keep your property while repaying debts over three to five years. Businesses typically use Chapter 11 to reorganize. Chapters 9, 12, and 15 serve municipalities, family farmers and fishermen, and international cases, respectively.

Each bankruptcy chapter serves a specific purpose and is available to different groups. Understanding these differences will help you determine which option, if any, suits your needs.

If you are unsure where to start, a bankruptcy attorney can evaluate your income, debts, and assets and help you understand your options.

The Two Main Types for Individuals: Chapter 7 vs. Chapter 13

Most bankruptcy filings refer to Chapter 7 or Chapter 13, which together account for over 95% of consumer cases. Both are available to individuals and married couples, and both can discharge, or permanently eliminate, most unsecured debts such as credit card balances and medical bills.

The main differences come down to income, assets, and objectives. 

• Chapter 7 is best for people with limited income, fewer assets to protect, and unsecured debts such as credit card balances or medical bills
• Chapter 13 is preferable if you have regular income, wish to keep property such as a home or car, or need time to catch up on missed payments

Your income, types of debt, and long-term financial goals will largely determine which chapter is appropriate or whether bankruptcy is the right solution.

Chapter 7 Bankruptcy: Liquidation

Those hoping to discharge debts will file for Chapter 7 bankruptcy. The bankruptcy process typically lasts three to six months.

After filing, a bankruptcy trustee will oversee your bankruptcy case. You’re required to complete a credit counseling course as part of the process. Some of your property may be seized and sold to pay off some or all of your debts. This is known as the liquidation of property.

A Chapter 7 bankruptcy will typically eliminate debts such as medical bills and credit card debt. While Chapter 7 can discharge debts, unsecured loans, and similar obligations, it won’t eliminate court-ordered child support, student loans, or alimony payments. In addition, certain types of property cannot be sold to pay off your debts. These exemptions vary by state.

Secured debts are handled differently from unsecured debts in Chapter 7. As the debtor, you have three options:

• Allow the creditor to repossess the property that secures the debt
• Continue to make payments on your debt to the creditor
• Pay the creditor a sum equal to the replacement value of the property that secures the debt

Certain secured debts may be eliminated in Chapter 7, providing a fresh start. A key benefit of Chapter 7 is that some unsecured debts, which aren’t backed by collateral, can be discharged. A discharge doesn’t remove liens.

To file for Chapter 7, you must meet eligibility requirements. You need to show that you can’t qualify for a Chapter 13 repayment plan. You must pass a means test, which is based on your income and ability to pay costs of living. You can check the article “Debts That Remain After a Chapter 7 Discharge” for more information.

Chapter 13 Bankruptcy: Reorganization

Chapter 13 bankruptcy is also known as the wage-earner’s plan. Sometimes called a “reorganization bankruptcy,” it allows you to restructure what you owe into a manageable repayment plan, rather than liquidating assets.

In Chapter 13, you work with the court to create a payment plan and make monthly payments for three to five years. The payment amount depends on your income, total debt, and the unsecured creditors’ share under Chapter 7.

Chapter 13 may allow you to repay secured debts without losing the property securing them. This can help prevent foreclosure or repossession. Past-due payments can be included in your repayment plan and paid over several years.

To qualify for Chapter 13, you must have a regular source of income. Your noncontingent, liquidated unsecured debts must fall below $526,700, and your noncontingent, liquidated secured debts must fall below $1,580,125 at the time you file. Married couples may file jointly as long as the same limits apply to the combined debt. Stockbrokers and commodity brokers are not eligible for Chapter 13 regardless of income or debt level.

After completing your repayment plan, remaining eligible unsecured debts are discharged. For more details on benefits and drawbacks, see Advantages and Disadvantages of Chapter 13 Bankruptcy.

Chapter 11 Bankruptcy: Reorganization for Businesses and High-Debt Individuals

Chapter 11 is primarily used by businesses. It allows companies, from small partnerships to large corporations, to continue operating while restructuring debts under court supervision. Instead of closing, the business proposes a reorganization plan that creditors and the court must approve.

Chapter 11 is the most complex and expensive bankruptcy option under current bankruptcy law. Legal and administrative costs can be substantial, making it impractical for most individuals.

Chapter 11 is an option when debts exceed Chapter 13 limits or the business’s owner owns significant nonexempt property, such as multiple investment properties. Chapter 11 offers broader restructuring tools than Chapter 13.

For small businesses, Subchapter V was added to Chapter 11 by the Small Business Reorganization Act of 2019. Subchapter V streamlines the process, making reorganization faster and less expensive for the eligible small business owner.

Chapter 12 Bankruptcy: For Family Farmers and Fishermen

Chapter 12 was created for family farmers and commercial fishing operations. It also has a three- to five-year repayment plan, but includes provisions tailored to agricultural and fishing businesses.

Key features of Chapter 12 include:

• Higher debt limits than Chapter 13, making it accessible to farmers and fishermen who carry significant operational debt
• Flexibility for seasonal income, so payment schedules can account for months with little or no revenue
• The ability to modify the terms of mortgage loans on farmland in ways not available under other chapters

Chapter 12 is similar to Chapter 13, but only available to family farmers or those with a fishing operation. You will need to provide proof of the following:

• Your business lenders
• The amount of each claim
• Your total annual income and frequency of your income (for seasonal operations)
• Your property and assets
• Your expenses per month (e.g., utilities for buildings, taxes, transportation of workers or products, medicine and food for fish or animals, fertilizer, etc.)

Like other types of bankruptcy, Chapter 12 has eligibility requirements and debt thresholds.

Chapter 9 Bankruptcy: For Municipalities

Chapter 9 bankruptcy is for municipalities, school districts, and cities. It protects municipalities from creditors while they negotiate a plan to resolve existing debt. States cannot file for bankruptcy under any chapter of the Bankruptcy Code. This type of bankruptcy may negatively affect public employees and other stakeholders.

Chapter 9 cases are rare. Since 1950, only about 60 cities, towns, villages, and counties have filed under Chapter 9. Detroit, Michigan, filed for Chapter 9 protection on July 18, 2013, making it the largest municipal bankruptcy in U.S. history by debt, with estimates ranging from $18 to $20 billion. Before Detroit, Jefferson County, Alabama, held the record after its 2011 filing of roughly $4 billion in debt.

Chapter 9 gives municipalities broad discretion over their reorganization plans.

Chapter 15 Bankruptcy: International Cases

Chapter 15 bankruptcy is available in both foreign and U.S. courts. It allows them to communicate and cooperate if foreign bankruptcy filings somehow affect financial interests in the United States. This is the only type of bankruptcy that does not provide for discharge or reorganization. Instead, these rules determine how to handle foreign bankruptcy proceedings involving U.S. assets.

Chapter 15 was enacted in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act and is based on the UNCITRAL Model Law on Cross-Border Insolvency. It does not provide a path to debt discharge on its own, but creates a framework for cooperation between U.S. bankruptcy courts and foreign proceedings. Most individuals and businesses will never interact with Chapter 15.

Which Type of Bankruptcy Should You File?

The right chapter depends on who you are, the types of debt you owe, and the assets you are trying to protect. Let’s take a closer look.

For Individuals

Most individuals will choose between Chapter 7 and Chapter 13. The following is the general guide:

• Chapter 7 bankruptcy is an appropriate option if you have low or limited income, few substantial assets to safeguard, and primarily unsecured debts such as credit card balances or medical expenses. The process is generally swift, typically concluding within three to four months.
• Chapter 13 is intended for repayment, not debt cancellation. It’s often a better fit if you have regular income, want to keep your home or car, or are behind on secured debt payments and need time to catch up.
• Chapter 11 may apply if your debts exceed Chapter 13 limits and you have the income to support a reorganization. It’s rarely the right choice for individuals due to cost and complexity.
• Chapter 12 is limited in application. It’s only available to family farmers or those who operate a commercial fishing business.
• Chapter 9 is available only to municipalities, school districts, and cities. Individuals cannot file under this chapter.
• Chapter 15 is not a tool for individual debt relief. It applies only to cross-border insolvency cases.

For Businesses

Businesses have fewer options:

• Chapter 7 is appropriate for a business that is closing and needs to liquidate assets to pay creditors
• Chapter 11, or Subchapter V for small businesses, is for businesses that want to reorganize and continue operating
• Chapter 12 is available for family farm or fishing operations
• Chapter 13 is not available to businesses. It is only for individual filers

Regardless of which one you choose, be aware that bankruptcy is a serious undertaking that will have a negative effect on your credit rating.

Key Factors to Consider

Before deciding which chapter to file under, consider the following:

• Your income level and how stable it is
• The types and total amounts of your debts
• What property you own and want to keep
• Whether you are behind on secured debts like a mortgage or car loan
• Your long-term financial goals
• Whether you can realistically commit to three to five years of structured payments

Because bankruptcy analysis is highly fact-specific, consulting a bankruptcy attorney before filing is strongly recommended. An attorney can run the means test and explain your state’s exemptions. They can also help identify additional options and advise on timing to protect your interests.

Alternatives to Bankruptcy

Bankruptcy is a powerful legal tool, but it is not always the best first step. Before filing, consider whether any of these alternatives may address your situation:

Debt Negotiation or Settlement

You may be able to negotiate directly with creditors to reduce the total balance owed. Debt settlement companies can negotiate on your behalf, though results vary and some charge high fees. Settled debts may be resolved for less than the full balance, but the forgiven amount could be treated as taxable income by the IRS. There is no automatic legal protection from collections during negotiations.

Debt Management Plan

Nonprofit credit counseling agencies can work with your creditors to create a debt management plan (DMP). A credit counseling agency collects a single monthly payment from you. They then pass these funds to your creditors. These agencies often negotiate lower interest rates on your behalf. However, you will still repay the full principal, and the process typically takes three to five years. Creditors are not legally required to participate.

Debt Consolidation Loan

A debt consolidation loan pays off multiple debts with a single new loan, ideally at a lower interest rate. This simplifies payments but does not reduce the total amount owed. Qualifying usually requires good credit, and if the loan is secured by an asset such as your home, you risk losing that asset if you default.

Budget Restructuring

If your financial shortfall is modest, restructuring your budget by cutting expenses, increasing income, and applying extra funds to debt may be sufficient. This approach works best when you can realistically afford your obligations over time and need to tighten spending.

Doing Nothing (“Judgment Proof” Status)

If you have no income and no significant assets, creditors may have no practical way to collect from you. Courts sometimes call this status “judgment proof.” What it means is that even if the creditor wins a lawsuit against you, they still have no way to actually collect the debt.

In this case, bankruptcy may not be necessary. This approach carries risks, including creditor harassment, lawsuits, and potential wage garnishment if your financial situation improves.

Contact a Bankruptcy Lawyer for More Information

If you are unsure whether you qualify for Chapter 7 or Chapter 13 bankruptcy, need help with bankruptcy forms, have debt management questions, or seek legal advice, consult a bankruptcy attorney. An experienced attorney can help you evaluate your options and explain your state’s exemptions. They can also help you take the right steps in filing bankruptcy proceedings.