There are six types of bankruptcy in the U.S. Bankruptcy Code, but most people filing for themselves use one of two: Chapter 7, which wipes out many debts in a few months, or Chapter 13, which sets up a three to five year repayment plan. This guide explains each one and what it means for your credit.
WalletMD isn't a law firm, and this guide isn't legal advice. Bankruptcy has strict rules and deadlines. Talk with a bankruptcy attorney before you file. Many offer a free first consultation, and legal aid offices can help if you qualify.
The six types at a glance
| Chapter | Who uses it | What it does |
|---|---|---|
| Chapter 7 | Individuals and businesses | Liquidation. A trustee can sell property that isn't protected, and many remaining debts are discharged. |
| Chapter 13 | Individuals with regular income | A repayment plan of three to five years. You usually keep your property. |
| Chapter 11 | Mostly businesses, some individuals with large debts | Reorganization. The business keeps operating while it restructures its debts. |
| Chapter 12 | Family farmers and fishermen | A repayment plan built around seasonal income. |
| Chapter 9 | Cities, towns and other municipalities | Debt adjustment for local governments. |
| Chapter 15 | Cases involving more than one country | Coordinates with bankruptcy cases filed abroad. |
Chapter 7: liquidation
Chapter 7 is the fastest option. A court-appointed trustee reviews what you own. Property protected by your state's or the federal exemptions stays with you; property that isn't protected can be sold to pay creditors. Many cases are finished in about four to six months.
- Who qualifies: you have to pass a "means test." If your income is below your state's median for your household size, you generally qualify. If it's higher, the test looks at your expenses to see whether you could repay some of your debts.
- Credit report: a Chapter 7 bankruptcy can stay on your credit reports for up to 10 years from the filing date.
Chapter 13: repayment plan
In Chapter 13, you propose a plan to repay some or all of your debts over three to five years, through a trustee. You usually keep your home and car, and it can stop a foreclosure while you catch up on missed payments. Debts covered by the plan that are still left when you finish can be discharged.
- Who qualifies: individuals with regular income whose debts are under the limits set by law.
- Credit report: the three major credit bureaus generally remove a Chapter 13 bankruptcy seven years after the filing date.
Chapter 7 vs. Chapter 13
| Chapter 7 | Chapter 13 | |
|---|---|---|
| How long the case takes | About 4 to 6 months | 3 to 5 years |
| Your property | Property that isn't exempt can be sold | You usually keep it |
| Income rules | Must pass the means test | Need regular income to fund the plan |
| On your credit report | Up to 10 years | Generally 7 years |
What every filer has to do
- Credit counseling before you file. You must take a course from an approved agency within 180 days before filing.
- A debtor education course before discharge. A second course on budgeting, also from an approved provider.
- Full disclosure. You list everything you own, owe and earn. Leaving things out can get your case dismissed.
The U.S. Trustee Program keeps the list of approved course providers at justice.gov/ust.
Debts bankruptcy usually doesn't erase
- Child support and alimony
- Most student loans, unless you prove "undue hardship" in a separate court case
- Most recent tax debts
- Criminal fines and restitution
- Debts from injuring someone while driving drunk
As soon as you file: the automatic stay
Filing triggers an "automatic stay." Most collection actions have to stop, including lawsuits, wage garnishments, collection calls and many foreclosures. There are exceptions, and the stay can be limited if you've filed before recently.
After bankruptcy: check your credit reports
An accurate bankruptcy can't be removed early. What you can fix is how each account was reported. About 60 days after your discharge, get your free reports at AnnualCreditReport.com and check:
- Every debt included in the bankruptcy shows a $0 balance and a status like "discharged" or "included in bankruptcy."
- No account included in the bankruptcy shows new late payments after the filing date.
- The filing date and chapter are correct.
If something is wrong, dispute it with the credit bureau. It generally has to investigate within 30 days and fix information that's inaccurate or can't be verified.
Alternatives to consider first
Depending on your situation, a nonprofit debt management plan, negotiating directly with creditors, or simply waiting out old debts may be better than filing. A nonprofit credit counselor can walk through the options with you, often for free.