There are a couple kinds of personal bankruptcy you could choose to go through if you want to clear up your finances. Each has its own benefits and downsides. The main types of bankruptcy to choose from include Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Chapter 7 bankruptcy is also known as liquidation bankruptcy. In this form of bankruptcy, you liquidate your assets to pay back debts. When you talk about bankruptcy with others, this is likely the type of bankruptcy you talk about.
Does a Chapter 7 bankruptcy liquidate all your assets?
Although many people believe a Chapter 7 bankruptcy leaves the debtor with nothing, that's not the case. The point of the bankruptcy is to pay back as much as possible while still allowing the debtor to keep exempt items. For instance, your main vehicle may be exempt from the bankruptcy, so you don't have to sell it to pay a debt. There may be cases when you can keep your home, clothing or other items, too.
What's the difference between Chapter 7 and 13?
In Chapter 13 bankruptcy, you don't have to liquidate your assets. Instead, you'll pay back your debts on a plan that spans three to five years. If completed on time, any remaining debts are discharged at the end of the term. For individuals who have an income but need help paying down debts, this is a better option. It's like a consolidation of debts, but it still reduces what you owe. Either option can work to help you get out of debt.
Source: The Balance, "Basic Types of Personal Bankruptcy," LaToya Irby, accessed Oct. 20, 2017