This updated article explains the purpose and mechanics of major U.S. bankruptcy chapters: Chapter 7 (liquidation with a means test), Chapter 13 (individual repayment plans for three or five years), Chapter 11 (complex reorganizations), Chapter 9 (municipal debt adjustment), and Chapter 12 (family farmer/fisherman plans). It highlights eligibility considerations and the trade-offs among speed, asset protection, and cost.
Quick overview
U.S. bankruptcy law divides relief into chapters that serve different people and entities. Chapters 7 and 13 are the common consumer options. Chapter 11 mainly serves businesses (and some wealthy individuals). Chapters 9 and 12 target municipalities and family farmers/fishers, respectively.
Chapter 7 - liquidation for qualifying debtors
Chapter 7 lets eligible debtors discharge many unsecured debts by liquidating nonexempt assets. A means test determines eligibility: the court compares the filer's income to median incomes for a household of the same size in that state and applies the statutory means-test calculations.
If a filer qualifies, a trustee may sell nonexempt property to pay creditors and then the filer receives a discharge of many remaining unsecured debts. Some obligations - child support, most recent taxes, and most student loans - are generally not discharged.
Chapter 13 - reorganize and repay over time
Chapter 13 is a wage-earner repayment plan. It lets individuals with regular income propose a repayment plan to pay some or all debts over a set period, typically three or five years depending on income and other factors.
Under Chapter 13, debtors keep their property while making plan payments to a trustee, who distributes funds to creditors. Chapter 13 is often used to catch up on mortgage arrears, protect co-signers, or repay priority debts over time.
Chapter 11 - reorganization, flexible but costly
Chapter 11 allows more flexible reorganization and is commonly used by businesses. Filers submit a reorganization plan and can negotiate with creditors while continuing operations in many cases. Chapter 11 is more complex and expensive than consumer chapters, which is why businesses and wealthy individuals most often use it.
Chapter 9 and Chapter 12 - specialized chapters
Chapter 9 provides municipal debt adjustment for cities, towns, and other public entities. It operates differently from consumer bankruptcies and does not use the means test.
Chapter 12 is a specialized reorganization for family farmers and fishermen with regular income. It allows tailored repayment plans to reflect seasonal and cyclical income, subject to statutory eligibility rules.
Choosing the right chapter
Courts and trustees look at income, assets, the types of debt, and future earning capacity when determining the appropriate chapter and whether a plan is feasible. Chapter 7 can offer a faster discharge for qualifying debtors; Chapter 13 preserves property and stretches payments to fit income. Chapter 11 gives flexibility for larger reorganizations but carries higher costs.
If you face bankruptcy, consult a qualified bankruptcy attorney or nonprofit counseling service for advice specific to your situation. Laws and procedures change over time, and local rules can affect how a case proceeds.