There are three different kinds of bankruptcy, Chapter 7, Chapter 11 and Chapter 13. These names refer to the chapter of the federal statutes (the Bankruptcy Code) that contains the bankruptcy law. Chapter 11 is for large debts and is a complex, time-consuming and expensive process. It is used primarily by businesses because it allows them to stay in business but is rarely used by consumers.

Filing for bankruptcy puts into effect an "automatic stay" which immediately stops creditors from trying to collect what you owe. This way they cannot legally garnish your wages, empty your bank account, go after your property or cut off your utility service or welfare benefits. Until the bankruptcy case ends, your financial problems are in the hands of the bankruptcy court which assumes legal control of the property you own that is not exempt and the debts you owe.

Chapter 7 bankruptcy is also sometimes called "straight" bankruptcy. Filing for Chapter 7 bankruptcy allows you to discharge (eliminate) most of your debts in exchange for property that is not protected by "exemption" laws. If you don't own very much property, you may be able to keep the little you have. A bankruptcy trustee will sell this property and distribute money to the creditors. Whatever amount remains will be cleared. The bankruptcy trustee is appointed through the court in order to see that your creditors are paid as much as possible on what you owe them. It is in their best interest because the more assets the trustee recovers for creditors, the more the trustee is paid.

The Chapter 7 bankruptcy process takes about four to six months and costs $200 in filing and administrative fees. Often, you only have to go to court once. Property that is exempt, meaning you can keep it depends on the state in which bankruptcy is filed. Most states let you keep clothing, household furnishings, Social Security payments you haven't spent and other basic items. Nothing can be sold or paid without the court's consent.

Chapter 13 bankruptcy allows you to rearrange your financial affairs, repay a portion of your debts and get control of your finances. You repay your debts through a Chapter 13 plan which typically has you make monthly payments to a bankruptcy trustee for three to five years. The trustee distributes the money to your creditors. You can use a Chapter 13 to stop a house foreclosure, make up missed mortgage payments and keep the house. You can also pay off back taxes through this plan and stop interest from accruing on your tax debt. For the entire length of the case (three to five years) you must live under a strict budget; the bankruptcy court will not allow you to spend money on anything it deems nonessential. This kind of bankruptcy can stay in your credit file for up to ten years but is not often reported for more than seven years.