10 Common Bankruptcy Questions

Which Type of Bankruptcy Should I File?
Liquidation is the title of Chapter 7 in the U.S. bankruptcy code. All your assets are sold and the proceeds distributed among your creditors. sserg_dibrova/iStock/Thinkstock

Officially, there are six different types of bankruptcy, each named after its respective chapter of federal bankruptcy law. But for the vast majority of people, there are only two real choices: Chapter 7 or Chapter 13.

Chapter 7 is called a "straight" bankruptcy, because it's relatively simple and quick. All of the debtor's assets are sold -- except for those that are exempt, which we'll talk about later -- and the proceeds are distributed among the creditors. The title of Chapter 7 in the bankruptcy code is Liquidation. The irony is that most Chapter 7 filers have no real assets to liquidate, at least none that aren't protected by exemptions.

To qualify for Chapter 7, you have to earn less than your state's median income, preferably a lot less [source: FindLaw]. If your income is too high, then your creditors might argue that you can, in fact, afford to pay back the debt in installments, which brings us to Chapter 13.

Chapter 13 bankruptcies are for people who earn a steady paycheck, but still can't afford to pay all their debts on time. Chapter 13 allows the debtor to consolidate his or her debts, negotiate a lower total balance, and submit a three- to five-year plan for paying back the debt in monthly installments. If a Chapter 13 filer fails to make timely payments, the case can be converted into a Chapter 7 liquidation.