Essentially, there are basically two types of bankruptcy available to individuals. Even though looked at as being two types, Chapter 7 and Chapter 13 bankruptcy do have certain similarities. Also, there exists the option of moving from one to the other provided you fill certain prerequisites.
In a typical case where Chapter 7 bankruptcy comes into play, the debtor would be a person with very few assets and a lot of debts. In such a case anything that the debtor may own is used to pay off creditors, but unlike with Chapter 13 where certain debts are dischargeable, in Chapter 7 bankruptcy they are not. (By dischargeable one means that payment of debt can be avoided if the court grants a discharge.)
A debtor would ordinarily file a Chapter 13 bankruptcy because of any sort of arrears, for example with rent or car loan or things like that. Creditors are paid based on a plan for the future earnings of the debtor. For this to come into effect, the basic requirement is that the debtor has a regular income.
Apart from these, a third type of bankruptcy is called a Chapter 12 which is limited to family farmers. On a larger level, we can also look at Chapter 11 which deals with cases where the debt in question is a huge sum. Ordinarily, Chapter 11 debtors are companies, and the processes involved in filing the same extremely complex.
Coming back to personal bankruptcy, while with Chapter 7 bankruptcy filing there is no ceiling for debt restrictions the rules change with Chapter 13. In the latter the debtor must figure out a Best-odds budget and a Best-effort budget for the creditors.
