There are basically two types of consumer bankruptcy: a “Chapter 13" bankruptcy and a “Chapter 7" bankruptcy. In a Chapter 7 bankruptcy, also called a liquidation, your unsecured debt can be written off (you do not have to pay it) unless you have non-exempt property (such as a boat) that can be sold to pay it. You will not be forced to sell your car or your home to pay debts in a Chapter 7 bankruptcy, unless they are securities for a debt. Secured creditors (like the mortgage company or a car dealer) have the right to take, or repossess, the security (like the house or the car) and sell it to apply the money toward the secured debt unless you are able and willing to pay the secured creditor what is owed and continue the contract (and the creditor agrees to continue it or the bankruptcy court orders the creditor to continue it). If the proceeds of the sale of the security do not pay all of what is owed, the remaining balance can be written off so that you may not owe anything else on that debt.

In a Chapter 13 bankruptcy, you begin a repayment plan to repay as much of your debt as possible in no more than 5 years. To do a Chapter 13 bankruptcy, however, you must have a steady income so you can make the monthly payments to the bankruptcy court. You must show the court that you can meet all your living expenses, like your mortgage or rent payment, along with your monthly bills, and still have enough money leftover at the end of the month to pay the bankruptcy court plus the back payments owed to your secured creditors. Many people on fixed incomes cannot do this.