The 3 Types of Bankruptcies

Chapters 7, 11, or 13 are the most common types of bankruptcies most individuals and businesses file for in the U.S. Each type offers different solutions for managing debt, whether by liquidating assets or creating a payment plan, but the right option depends on your circumstances. Below, we’ll break down these common bankruptcy types, their eligibility requirements, and how the process for each one typically unfolds. 

What is bankruptcy, and how does it work?

Bankruptcy is a legal process that allows individuals or businesses, known as debtors, to eliminate or repay their debts in accordance with federal bankruptcy laws (i.e., U.S. Bankruptcy Code). Likewise, creditors have the opportunity to receive some repayment, depending on the type of debt, bankruptcy chapter, and specifics of the case. 

Here are the basics of the main bankruptcy chapters: 

• Chapter 7:  Known as “liquidation” and “straight” bankruptcy, it involves the sale of the debtor’s non-exempt assets, if any, to pay off creditors. 
• Chapter 11: This type allows businesses (and individuals in business) to restructure debts into future payments while continuing operations. 
• Chapter 13: Individuals with regular income may seek “wage earner's” bankruptcy, which allows them to repay some or all of their debts over three to five years. 

To begin the process, the debtor must file a petition, a list of assets and liabilities, tax returns, and similar financial information with their district’s bankruptcy court (some areas may have multiple courts available). Upon filing, most creditors can no longer attempt to collect repayment. 

Next, the debtor must attend a meeting of creditors, where they answer questions about their financial situation and the bankruptcy documents. The court can then take several months (and sometimes years) to issue a decision, but if it approves a discharge, the debtor is no longer liable for some or all of the remaining debts. 

Still, the exact process depends on which chapter you pursue, so we’ll review the details of each one in the following sections. 

Chapter 7 bankruptcy overview

Chapter 7 is also called “liquidation” and “straight” bankruptcy since it requires the debtor to sell assets in order to repay creditors. It’s the most common type in the U.S., with more than 260,000 bankruptcy filings alone in 2023—and over 99% of individual debtors receive a discharge.

Key takeaways

Best for: Individuals and small businesses with a monthly income lower than the median for their state or who can pass the means test (see below). 

Core focus: Creditors receive the proceeds from the sale of the debtor’s assets, and any remaining debt is discharged. 

Pros: 

• Often the fastest and easiest type of personal bankruptcy, with most cases resolved in 4 to 6 months.
• Many individual debtors have “no asset” cases, meaning the court doesn’t seize any property.
• Federal and state bankruptcy exemptions help protect essential assets, such as equity in a primary home (up to a certain amount).

Cons: 

• Must sell non-exempt assets to cover any debts that aren’t discharged. 
• Not as easy to qualify for Chapter 7 due to the income requirement. 
• The debtor is still liable for some debts, including student loans, child support, and certain taxes. 

Eligibility requirements

Individuals, partnerships, corporations, and other business entities (such as sole proprietors) can file for Chapter 7 bankruptcy. If the debtor’s monthly income exceeds the state median, they must pass the “means test” to qualify. 

The test calculates whether the debtor has enough disposable income to repay some of their debts. If the debtor’s monthly income over five years exceeds the specified limits—after subtracting certain allowed expenses (like a mortgage or car payment)—they may not be eligible for Chapter 7.

Process

The Chapter 7 bankruptcy process involves several steps, but most of it doesn’t require the debtor’s participation. Here’s how it works: 

1. Complete a credit counseling course. Before filing, the debtor must complete an educational course from an approved agency within 180 days. 
2. File required forms. Submit the necessary Chapter 7 bankruptcy forms to the court and bankruptcy trustee (the person responsible for overseeing the case and distributing assets to the creditors). 
3. Attend the meeting of creditors. Also known as the 341 meeting, this is where the debtor answers questions about their financial situation under oath. 
4. Complete a debtor education course. After filing, the debtor must complete another course to be eligible for discharge. 
5. Receive discharge (if approved). The debtor receives notice of the court’s decision and what debts were discharged.

Keep in mind that this is a basic overview of Chapter 7 bankruptcy, and debtors should plan for it to take up to six months. 

Chapter 11 bankruptcy overview

Also known as “reorganization” bankruptcy, Chapter 11 is primarily for businesses, but individuals can qualify. This type of bankruptcy allows debtors to keep their business running and pay creditors through installments instead of liquidating assets. 

Key takeaways

Best for: Financially troubled businesses and some individuals with substantial debt who need to restructure their obligations while continuing operations.  

Core focus: Debtors reorganize their finances and create a plan to repay creditors over time. 

Pros: 

• Enables businesses to remain operational and potentially make a full recovery. 
• Provides a structured plan to manage debts while protecting the business from creditors. 
• May borrow new money with the court’s approval. 

Cons: 

• The process is often complex and lengthy. 
• Requires ongoing court oversight and compliance with the reorganization plan.
• Can be expensive due to legal and administrative costs.

Eligibility requirements

Chapter 11 bankruptcy is available to most business structures, including partnerships, corporations, limited liability companies (LLCs), and joint ventures. Individuals in business can also file for Chapter 11 bankruptcy, provided they can reorganize their debts and remain operational. 

Unlike Chapter 7, Chapter 11 does not have an income limit, meaning high-income individuals or businesses may qualify if they’re facing substantial debt. 

Process

The Chapter 11 bankruptcy process shares some similarities with Chapter 7, particularly in the initial steps. Like Chapter 7, individuals filing for Chapter 11 must complete approved credit and debtor education courses, file the necessary bankruptcy forms, and attend a meeting of creditors. 

However, Chapter 11 involves additional steps focused on organizing the business and repaying creditors, which include the following: 

1. Create a reorganization plan. The debtor, acting as a “debtor in possession,” takes on the role of the court appointed trustee. They are responsible for managing the business operations and creating a plan to restructure debts. 
2. Plan review. After the meeting of creditors, the debtor submits their reorganization plan to the court. The creditors then review the plan and vote to accept or reject the proposal. 
3. Confirmation and discharge. If the court and a majority of creditors approve the plan, the debtor implements it. Upon completion, the court may discharge the remaining debts.

The process can take several years, especially for larger businesses that require substantial changes to comply with the reorganization plan’s terms.

Chapter 13 bankruptcy overview

In some ways, Chapter 13 bankruptcy is a mix between Chapter 7 and 11. It’s primarily for individuals with regular income, but rather than liquidating assets, it allows them to repay creditors over time and keep their assets. 

Key takeaways

Best for: Individuals with regular incomes, less than $2.75 million in debts, and the ability to create a plan to manage overdue payments. 

Core focus: Debtors keep their property and typically repay debts over three to five years through a court-approved repayment plan. 

Pros: 

• Debtors can keep significant property like their homes or cars and avoid foreclosure. 
• The court may discharge certain unsecured debts after the debtor completes the plan. 
• Makes it easier to catch up on missed payments and organize future finances. 

Cons: 

• Requires a consistent income to meet the repayment obligations. 
• The process can last up to five years (and sometimes more in rare cases) to meet the payment obligations. 
• Failure to adhere to the repayment plan may result in the case being dismissed or converted to Chapter 7 bankruptcy. 

Eligibility requirements

Chapter 13 bankruptcy is available to individuals, including those who are self-employed or operating an unincorporated business, if the combined total of their secured and unsecured debts is less than $2,750,000 at the time of filing. While there isn’t a minimum income limit, debtors should be able to demonstrate their income potential and ability to keep up with the repayment plan. 

Process

The Chapter 13 bankruptcy process has the same first steps as Chapters 7 and 11, including taking a credit counseling course, filing paperwork, and attending the meeting of creditors. In addition, debtors can expect the following: 

1. File a repayment plan. Debtors must submit their repayment plan with their petition or within 14 days after filing it. 
2. Begin making payments. Debtors must start their Chapter 13 payments about a month after filing (before the court officially approves the plan) to ensure the timely completion of the case. 
3. Confirm the payment plan. Later, the creditors and the bankruptcy trustee will approve or reject the proposal. If rejected, the previous payments will be returned to the debtor. 
4. Payment plan completion. The court may discharge the remaining debt once the debtor finishes their payments (and the second education course). 

While Chapter 13 bankruptcy allows debtors to keep their homes, having a reliable income for at least three to five years is crucial to follow through with the debt payments. 

Other types of bankruptcy

Chapters 7, 11, and 13 are the most common types of bankruptcy, but there are a few other chapters and debt relief options for unique circumstances, including the following: 

Chapter 9 municipal bankruptcy

Chapter 9 bankruptcy provides debt relief for cities, towns, school districts, and counties. It allows them to restructure their debts while maintaining essential services, similar to how Chapter 11 bankruptcy affects businesses. For reference, Detroit, Michigan, filed the largest Chapter 9 case in U.S. history in 2013, with approximately $18 billion in debt.  

Chapter 12 bankruptcy 

Designed for family farmers and fishermen with regular annual incomes, Chapter 12 bankruptcy allows them to continue operations while repaying creditors over time. From 2018 to 2019, Chapter 12 bankruptcies were especially common in the Midwest and Northwest, as collective farm debt reached an all-time high of $416 billion.  

Chapter 15 cross-border bankruptcy

Chapter 15 bankruptcy addresses international cases. It’s used when a foreign debtor has assets in more than one country or if a U.S. court’s assistance is needed in a foreign proceeding. For example, Evergrande, a Chinese real estate company, filed for Chapter 15 bankruptcy in 2023 after defaulting on its debts. 

How to choose the right type of bankruptcy

While each situation is unique, you should keep the following bankruptcy basics in mind as you evaluate your options:

• Get legal advice. A bankruptcy attorney can help you determine the right bankruptcy chapter for your situation and prepare for the process ahead. Plus, they must charge a reasonable rate given the work required and obtain court approval. 
• Assess your financial situation. Take stock of your current income, assets, and overall financial health. 
• Understand your debt. Calculate how much secured (e.g., mortgages and auto loans) or unsecured debt (e.g., credit cards or medical bills) you have.
• Factor in the costs. Consider filing fees, administrative expenses, and potential attorney costs.
• Think about the credit impact. Evaluate how each bankruptcy type might affect your credit score and future borrowing ability. For reference, a bankruptcy filing can show on a credit report for up to ten years, depending on the chapter. 
• Consider your long-term goals. If keeping your home or car is a priority, Chapter 13 might be preferable. Conversely, Chapter 7 could be more appropriate for those needing immediate debt relief (and if they’re willing to liquidate non-exempt assets).
• Eligibility requirements. Above all, ensure you meet the criteria for your preferred bankruptcy type. A bankruptcy lawyer can help verify your eligibility and guide you toward the most suitable option. 

Whether you’re an individual struggling with consumer debt or a business facing financial hardship, there may be a bankruptcy option that can help you recover. However, given the complexities of bankruptcy law, consider reaching out to a qualified bankruptcy attorney.  

When you’re ready to get started, LegalZoom’s attorney network can connect you with an experienced lawyer in your area for an initial consultation, helping you take the first step toward financial stability.

FAQs

For more information about bankruptcy, here are some common questions other readers have: 

Is it cheaper to file Chapter 7 or 13?

Filing for Chapter 7 is generally cheaper due to lower attorney fees and court costs. Chapter 13 involves a repayment plan that can last several years, which usually results in higher legal and administrative expenses. 

How long do bankruptcies last?

Chapter 7 bankruptcy typically lasts four to six months from filing to discharge. Chapter 11 can take several years, depending on the complexity of the business reorganization. Chapter 13 may last up to five years, but the exact duration for all bankruptcies depends on the case and the debtor’s compliance with the court requirements. 

Can you live a normal life after bankruptcies?

Yes, you can live a normal life after bankruptcy, though rebuilding credit takes time. With the right financial habits and budgeting, many people can eventually secure new credit, buy a home, and achieve financial goals post-bankruptcy. 

Are all debts discharged in bankruptcy?

No, debts such as child support, student loans, and some taxes are typically not dischargeable. These obligations must still be paid after bankruptcy, though some chapters allow certain debts to be reorganized.