The most common types of bankruptcy and what alternatives to consider

If you've ever found yourself over your head with unpaid bills and mounting debt, you may have considered declaring bankruptcy at some point.

But before you think this will wash away all your money worries, understand that bankruptcy is a serious legal procedure that will have major consequences for your finances. Here's a broad overview of the two most common types (or "chapters) of bankruptcy you can declare as an individual, as well as some less drastic alternatives to consider.

• Chapter 7 bankruptcy
• Chapter 13 bankruptcy
• Alternatives to bankruptcy

Chapter 7 bankruptcy is one of the most common forms of bankruptcy that individuals file. It's reserved for those who need a fresh start and have unsecured debts that they just cannot pay back — things like credit cards, personal loans and medical expenses.

Formally, Chapter 7 is known as "liquidation bankruptcy" because you more-or-less liquidate any of your nonexempt assets to pay off creditors. These are assets, or property, not essential for basic living, such as second homes, expensive jewelry or art, luxury cars and valuable collections. In exchange, the bankruptcy court will discharge most of your unsecured debts, meaning you're off the hook. Debts that can't be discharged include payments for alimony and child support, as well as certain taxes and student loans.

There are exceptions to what assets can be liquidated to creditors. The list of exempt assets will vary by state, but, generally, it includes

• cars to a certain value
• equity in your home
• household items like clothes
• furniture and retirement accounts.

The Chapter 7 bankruptcy process can usually be completed within three to six months. To see if you qualify, you need to take what's called a "means test," which looks at your average monthly income relative to your state's median income for your family size. This determines if your income is low enough to be eligible for Chapter 7. If you don't qualify to have your debt completely wiped out, you may then qualify for Chapter 13 bankruptcy, where you repay a portion of what you owe.

Chapter 7 bankruptcy can free you from debt, but it can also wreak havoc on your future finances. These bankruptcies stay on your credit report for up to 10 years from the filing date, which can make it difficult to qualify for loans and other types of credit.

Chapter 13 bankruptcy is another form of consumer bankruptcy — also known as "wage earner's bankruptcy" or "reorganization bankruptcy." Whereas Chapter 7 is a fresh start, Chapter 13 is less extreme and seen more as a soft landing. This type of bankruptcy is for qualified individuals who are behind on their debt payments but make a steady income.

With Chapter 13, a bankruptcy court will mediate the creation of a repayment plan between you and your creditors that will have you pay off all or part of what you owe — while still being able to keep your assets. A court-appointed trustee will collect your debt payments and distribute them to creditors. Assuming you honor your end of the repayment plan and meet other qualifications, the bankruptcy court will typically discharge any qualifying debt that remains after the plan's completion. Debts that don't qualify include mortgage payments, alimony or child support and some taxes. All in all, the process usually takes between three to five years.

Like with Chapter 7, Chapter 13 bankruptcies cause serious damage to your credit, remaining on your credit report for seven years from the filing date.

Before turning to bankruptcy, know that you have other options like debt consolidation and debt settlement. And if you still find that bankruptcy is the best option for you, consult a bankruptcy attorney before making any moves.

Debt consolidation loan

Debt consolidation means combining, or consolidating, your multiple debts into one single loan. This may be just the move you need to get on track, plus you can lower your interest rate and monthly payments. The kind of debt consolidation loan you qualify for is based on your credit.

If you have no credit history whatsoever, consider Upstart, which lets those with no credit score apply. Upstart will consider your education history and work experience when looking at your application for a debt consolidation loan.

Achieve® can be a good option if you have a credit profile, but it's not so good. You can qualify with a FICO® Score as low as 620.

And if you have good to excellent credit, consider LightStream, where your healthy credit can help you score a low interest rate on your debt consolidation loan, as well as a high borrowing limit.

Debt settlement

Debt settlement means enlisting a third party to negotiate you paying a lower amount with creditors. While this can be an alternative to bankruptcy, know that debt settlement comes with its own potential drawbacks such as high fees, credit score damage, possible legal action, plus no guarantee of relief.

For your best shot at settlement, try Americor®, which guarantees you won't pay any fees unless it lowers your total enrolled debt. Another stand-out provider is Freedom Debt Relief, which provides help even if you have a smaller amount of debt under $10,000.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every bankruptcy article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of debt relief products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.