All About the Different Types of Bankruptcy – Part 2

Oct 19, 2020 | Budgeting, Get Out of Debt

Bankruptcy is no joke! We're going to walk you through the nitty-gritty of the different types of bankruptcy, as well as a way to keep away from it!

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If you've reached this article, you should have already read all about bankruptcy and what exactly it is. If you haven't, you can find it Part 1 HERE. Go read it and we'll wait patiently for you to come back! 😉

Alright, now that you've got the background on that… Let's go over the different types of bankruptcy, what they are, and what they mean. Time to go into a little more detail about (the nerdy side of) it!


First, a little definition. When you file for bankruptcy, you are petitioning the court for relief under the federal and state bankruptcy codes. In other words, you are asking a judge to help you out and declare that even though you owe all of these people money, you don't have to pay them.

However, this doesn't mean that you get off scot-free! If the judge sides with you and grants your request, there are some strings attached.


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As we said in Part 1, there are two types of bankruptcy: Chapter 7 and Chapter 13. So what are these chapters; are they in a book? Yep, pretty much! The United States Code (abbreviated USC) is the massive document that contains all the federal laws of the United States – everything from railroads and shipping, to immigration, to the military, to hospitals, to bankruptcy. The USC has 52 “titles.”

Title 11 of the USC is where all the federal bankruptcy laws (or codes) are contained. Title 11 of the USC has nine chapters (the chapters go up to number 15, but six have been deleted). Chapter 7 and Chapter 13 are two of the chapters under Title 11.

Super clear, right? Ok, blink a couple of times and come back to us. Let's break this down a little better.


We're just going to focus on Chapter 7 and Chapter 13 bankruptcies and let all that other legal mumbo-jumbo go out the window for now. 😉


The title of Chapter 7 is “Liquidation,” which is why a Chapter 7 bankruptcy is called liquidation bankruptcy. Assets (your possessions) are liquidated, or sold off, to recoup funds for creditors.

With this first type of bankruptcy, you sell off almost everything that you own, take that money, and pay what you can before you walk away debt-free. Chapter 7 bankruptcy is a way to hit the reset button and start over.


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The title of Chapter 13 is “Adjustment of Debts of an Individual with Regular Income.” Chapter 13 is actually intertwined with Chapter 11, “Reorganization,” but Chapter 13 bankruptcy provides options for individuals. Chapter 12 provides for farmers and fishermen and Chapter 11 provides for business corporations, partnerships, and proprietors.

The second type of bankruptcy, also known as a wage earner's plan. You set up a payment plan and pay what you can. Chapter 13 bankruptcy is a way to catch up on debts and get right again.

With a Chapter 13 bankruptcy, you are “reorganizing” your future income. You're dedicating a certain portion, by court order, to repay some debts in order to be forgiven of others.


With Chapter 13, you do not have to liquidate your assets. You will still be required to pay off some or all of your debts, but you'll get to keep your possessions.

Okay, then why would someone file for Chapter 13 bankruptcy? If you make more than a certain amount of money every year, you are not eligible for a Chapter 7 bankruptcy, so Chapter 13 may be your only option. You may also like the idea of keeping your possessions. However, if you are too far in debt, you would not be eligible for Chapter 13.


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No matter how you slice it, if you declare bankruptcy, your life will never be the same again. And the 10-year road to get back to “normalcy” is hard. We are definitely not financial advisors of any sort. But if you asked our opinion, it would be this… We would personally only ever use bankruptcy to avoid repossession of everything in our life or avoid going to jail.

There is no feeling like being debt-free! You wake up feeling differently, you go to work feeling differently, your life seems brighter, and you are happier overall. There will be many who tell you bankruptcy is the way to achieve all that.

Those people are most likely only trying to get money out of you. If you meet someone who has been through the process and tells you that it is absolute bliss, first understand that no two bankruptcies are the same. Next, ask them a few questions. How is their living situation? When was the last time they rented a car? How high are their insurance rates, assuming they can find someone to insure them? How easy is it to buy something, anything, without cash in hand?


Avoid unnecessary debt at all costs. Avoid bankruptcy with more fervor than you would the plague. So much help is available if you need it, and you are already on the right path by visiting this website!

Even when you feel like all hope is lost, it's not! Budget Boot Camp is an amazing video program that has helped thousands of people not only get out of debt but get their finances in order and save up for their dream financial goals!

It's so much cheaper than filing for bankruptcy, and if you don't save at LEAST what you paid for the program, we'll refund every dime. You've got nothing to lose! Use the code FCFBLOG to get an extra 10% off at checkout because you deserve it.

Whew! Now you know all about the different types of bankruptcy, it's time to do everything you can to stay away from it! Let us know if you have any questions in the comments below.

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Need more tips on getting out of debt?

  • Get your grocery budget in check! You'll be able to put so much extra money towards your debt each month!
  • Overspending happens… Use our tips to bounce back and put a stop to it!
  • Our 70% rule is sure to help you get your finances in order and make sure you're not spending too much in one area of your life.

Now go kick your debt in the teeth!


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