Once you've decided that bankruptcy is the right solution for your financial situation, you will need to decide which type of bankruptcy is most beneficial.

If you are an individual or a small business owner, then your most obvious choices are Chapter 7 "liquidation" bankruptcy or Chapter 13 "wage earners" or "reorganization" bankruptcy.

We'll go over the pros and cons of each, the eligibility rules, and give you some information to help decide which would be best for you given your financial situation.

There are a select few other types of bankruptcies that are available under certain circumstances, and we will touch on those as well.

To get started, here's a look at the highlights of both Chapter 7 and Chapter 13 bankruptcy:

See: How to File for Chapter 7 Bankruptcy

See: How to File for Chapter 13 Bankruptcy

Chapter 11 and Chapter 12 are similar to the Chapter 13 repayment bankruptcy, but designed for specific debtors.

Chapter 11 bankruptcy is another form of reorganization bankruptcy that is most often used by large businesses and corporations. Individuals can use Chapter 11 too, but it rarely makes sense for them to do so.

Chapter 12 bankruptcy is designed for farmers and fisherman. Chapter 12 repayment plans can be more flexible those in Chapter 13. In addition, Chapter 12 has higher debt limits and more options for lien stripping and cramdowns on unsecured portions of secured loans.

In many cases, the type of bankruptcy filed will be contingent on two things: Your income and your assets. Your income is important because it may preclude you from filing a simple Chapter 7 case, and your assets are important because if you have nonexempt property, you might lose it in Chapter 7, but can protect it in Chapter 13.

Here are a few scenarios that explore which bankruptcy strategy would be best:

Loss of income combined with a large amount of debt is the number one reason people file for bankruptcy. Compounding factors like divorce, medical emergencies, or the death of a family member are also common. Assume that in this scenario the debtor has no income other than unemployment benefits, does not own a home, and has one car with a loan against it.

In cases like this, a Chapter 7 bankruptcy is the fastest, easiest, and most effective means of getting rid of debt. As a matter of fact, this is the most common bankruptcy case, often called a"no asset" bankruptcy.

Homeowners who are experiencing a loss of income also have options under bankruptcy law. For those homeowners whose property value has fallen below the value of the loan against it, Chapter 7 is probably still the best option. Since the value of the home is less than the value of the lien against it, the homeowner has no equity in the bankruptcy estate, so the house is protected from liquidation. A Chapter 7 bankruptcy can quickly relieve them of their obligations to repay unsecured debts, making monthly bills much more manageable.

If a homeowner has a significant amount of equity in property, then Chapter 7 may or may not be the best option. If the homeowner's state exempts a generous amount of home equity, then the home may be safe. But if the state homestead exemption doesn't cover the equity, the homeowner may lose the home in a Chapter 7 bankruptcy. The homeowner can keep the home in Chapter 13 bankruptcy if he or she keeps current on the mortgage. Keep in mind though, there must be enough income available from the petitioning household to fund a repayment plan.

For homeowners who have fallen behind on mortgage payments, Chapter 13 offers a way to catch up or "cure" past due mortgage payments while simultaneously eliminating some portion of dischargeable debt. This means they can save the home from foreclosure and get rid of a lot of credit card debt, medical debt, and possibly even second and third mortgages or HELOCs. Chapter 7 bankruptcy does not provide a way for homeowners to make up mortgage arrears.

Very wealthy debtors often need to file under Chapter 11 due to the debt and income limits of Chapter 7 and Chapter 13 bankruptcies.

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Which Type of Bankruptcy Should You File? Chapter 7 vs. 13 ...