Chapter 7 is the single most common bankruptcy chapter filed in the United States.  It is commonly known as liquidation bankruptcy and is available to both individuals and business debtors.

In Chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the property and distributes the proceeds to the debtor's unsecured creditors. Many individuals in financial distress own only exempt property (e.g. clothes, household goods, an older car) and will not have to surrender any property to the trustee. Social Security payments, unemployment compensation, retirement plans, and limited values of equity in a home, car, or truck, household goods and appliances, trade tools, and books are protected.  The amount of property that a debtor may exempt varies by state.

Chapter 7 relief is available only once in any eight-year period.  A debtor must also successfully pass the means test which calculates whether you are able to afford, or have the "means" to pay your debts. The means test annualizes your income for the past six months and compares it with the median income for your place of residence. The means test also includes your secured debt in determining whether you can afford to pay for your debts. If you fail to pass the means test, you can only file Chapter 7 bankruptcy under very specialized exceptions, and often must file for protection under Chapter 13 (individuals) or Chapter 11 (businesses).

Generally, the rights of secured creditors to their collateral continues even though their debt is discharged. For example, absent some arrangement by a debtor to surrender a car or "reaffirm" a debt, the creditor with a security interest in the debtor's car may repossess the car even if the debt to the creditor is discharged.

If Chapter 7 bankruptcy protection is not available to an individual debtor, relief under Chapter 13 may be an option.  A chapter 13 bankruptcy is also called a wage earner's plan as it enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.

Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on "consumer debts." This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.

Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $360,475 and secured debts are less than $1,081,400.