What Happens When a Customer Files for Bankruptcy? A Guide for Business Owners and Creditors

What Are Two Types of Bankruptcies? Understanding Chapter 7 and 13

What are two types of bankruptcies that individuals commonly consider when facing overwhelming debt? Chapter 7 and Chapter 13 are the most frequently filed options, each offering a unique approach to debt relief based on your income, assets, and financial goals. In this guide, we’ll break down how these two bankruptcy types work, how they differ, and which one may be the right fit for your financial situation.

Understanding Personal Bankruptcy

Bankruptcy is a legal process that allows individuals to eliminate or restructure debt under the protection of the U.S. Bankruptcy Court. It’s governed by federal law, which means the process is similar no matter what state you live in.

People file for bankruptcy for many reasons:

• Job loss
• Medical bills
• Divorce
• Credit card debt
• Business failure

Understanding what are two types of bankruptcies—and the purpose of each—can help you make an informed decision about your financial future.

Chapter 7 Bankruptcy: Liquidation

Chapter 7 bankruptcy is the most common type of consumer filing in the U.S. It’s designed for individuals who don’t have the income to repay their debts.

Key Features:

• Known as “liquidation bankruptcy”
• Wipes out most unsecured debts like credit cards, medical bills, and personal loans
• Typically resolved in 3 to 4 months

Who Qualifies?

You must pass a means test, which compares your income to the median income in your state. If your income is below the threshold, you likely qualify.

What Happens to Your Assets?

In theory, non-exempt property can be sold (liquidated) to pay creditors. However, most filers keep everything thanks to state and federal exemption laws, which protect:

• A certain amount of home equity
• Personal property like clothing, furniture, and retirement accounts
• A vehicle up to a set value

Debts That Are Discharged:

• Credit card debt
• Personal loans
• Medical bills
• Utility bills
• Certain old tax debts

Some debts, like child support, student loans (in most cases), and recent tax obligations, are not dischargeable.

Chapter 13 Bankruptcy: Reorganization

Chapter 13 is a repayment-based form of bankruptcy that allows you to reorganize your debts and pay them over time.

Key Features:

• Known as “wage earner’s bankruptcy”
• Best for people with regular income who want to avoid foreclosure or catch up on missed payments
• Involves a 3- to 5-year repayment plan approved by the court

Who Qualifies?

To file Chapter 13, you must:

• Have enough income to make monthly plan payments
• Have debts below specific limits (updated periodically by the courts)
• File all required tax returns

Benefits of Chapter 13:

• Stops foreclosure and allows you to catch up on mortgage payments
• Protects assets that might be lost in Chapter 7
• Consolidates your debts into a single monthly payment

At the end of the plan, any remaining eligible debt is discharged.

Key Differences Between Chapter 7 and Chapter 13

While Chapter 7 offers fast relief, Chapter 13 is more flexible and helps protect homes, vehicles, and other valuable assets. Your choice depends on your unique situation.

Choosing Between the Two Types of Bankruptcy

So, what are two types of bankruptcies every consumer should understand? Chapter 7 offers quick debt discharge for those with low income and few assets, while Chapter 13 helps those with regular income catch up on debts through a structured repayment plan. Your eligibility and financial priorities—such as asset protection or stopping foreclosure—will determine the best fit. Speaking with a qualified bankruptcy attorney ensures you’re choosing the most effective path for long-term financial recovery.

Need Help Choosing Between Chapter 7 and Chapter 13 Bankruptcy?

Still wondering what are two types of bankruptcies and which one is right for you? Legal Brand Marketing connects you with trusted bankruptcy attorneys who can assess your situation and guide you through the entire process. Whether you need immediate debt relief or want to protect your property while repaying what you can, we’ll help you make an informed decision. Get started today with a free consultation.