Types of bankruptcy are known as 'chapters' and each chapter represents a certain portion of the Federal Bankruptcy Act. Each of these chapters has its own set of laws and rules.

In general, bankruptcy laws vary by state the entire process is fairly similar no matter which state you happen to live in. Yes, bankruptcy can be a very complicated endeavor and yes, it is very important that you seek counseling before you decide to dive right into the act of going bankrupt.

With each bankruptcy filing there is a debtor and a creditor. For this exercise, we will assume that you are the debtor. The debtor is the party or person who owes money to the creditor.

Most bankruptcy cases will involve several different creditors. This is typically the case when someone has a lot of credit card debt. They are the debtor and they owe money to many different creditors (each of the credit card companies that they owe money to).

There are several different types of bankruptcy but for the sake of saving electronic space and time, we are only going to focus on the three most common types, in order of popularity.

Chapter 7 Bankruptcy

Chapter 7 is probably the most common form of bankruptcy. This type of bankruptcy is a liquidation bankruptcy. The debtor will be made to sell all all nonexempt assets so that the debts can be repaid, as much as possible, to the creditors.

Individuals, corporations and partnerships are all eligible to file for a chapter 7 bankruptcy. After the assets have been liquidated and the creditors have been repaid as much as possible, the remaining balance owed by the debtor will be discharged.

Individuals, rather than businesses, usually choose a Chapter 7 bankruptcy. Businesses usually try to avoid Chapter 7 because it is impossible to conduct business operations once they opt for this chapter of the bankruptcy code.

Individuals who opt for a chapter 7 bankruptcy are appointed a trustee of the court. The trustee is in charge of collecting your assets, selling them in order to raise cash, and then making distributions to the people that you owe money to.

Chapter 13 is a type of bankruptcy where you pay off your debts over a period of 3 to 5 years and you get to keep your property.

A Chapter 13 bankruptcy is designed for people who happen to have a regular income from a stable job.

The bankruptcy can either approve or disapprove a Chapter 13. Unlike a chapter 7, a chapter 13 bankruptcy can be file at any time (Chapter 7 only once every 7 years).

Chapter 11 is like a chapter 13 but is designed for businesses. This one can get a little complicated. With a chapter 11 bankruptcy, the debtor continues to function, maintains ownership of all assets, and tries to work out a reorganization plan to pay off creditors.

Most people who are looking at bankruptcy will only be concerned with a chapter 7. Typically, these are people who have a considerable amount of credit card debt.

The good news is that you may be able to avoid bankruptcy altogether. By using a debt consolidation loan or by signing up for a debt negotiation service, you may be able to lower your monthly payments and stay out of the bankruptcy courts.