The bankruptcy code is Title 11 of the United States Code (11 U.S.C). Title 11, like other titles, is broken up into chapters. It's organized by categories, for example, Chapter 1 contains all the definitions. Chapter 3 contains information on starting a case. Chapter 5 contains information on debtor's duties and rights and so on. Chapter 7, 9, 11, 12, 13 defines the types of relief available. For the sake of killing everyone, I will only and quickly talk about Chapter 7 and 13.
Chapter 7 bankruptcy is the type that wipes clear all debts (except for special debts like students loans, child support, tax, etc.) This type of relief is available to businesses and people who make less than the state's median income. The U.S. Department of Justice publishes a list of median income for all 50 states, and you have to make less than the median income to file a Chapter 7. There are still ways to get around this test, but I won't go into details here. The link is found here: http://www.justice.gov/ust/eo/bapcpa/20101101/bci_data/median_income_table.htm .
As you can see from this list, half of Washington residents with a household of one make less than $49,124/year. The other half make more than that. If you live in Washington, and you live by yourself, you have to make less than $49,124/year to qualify for a Chapter 7. The income calculation is convoluted and I won't go into details here. In this economy, most people I meet do qualify.
Chapter 13 is the type of bankruptcy where the debtor proposes a payment plan to the court. It requires debtors to pay back a portion of their debts. The amount of debt that someone has to pay back depends on their income. In some case, it might be all or it might be none. Chapter 13 is for those who either make more than the median income, have excess properties that can't be protected in a Chapter 7, or are trying to avoid foreclosure. Chapter 13 is complicated and I wouldn't recommend anyone taking it on themselves. (See my post on hiring a lawyer).
I had an extremely upset person come into my office demanding to file a Chapter 7. He was so upset at me when I told him he didn't qualify that he threatened to report me to the state bar. I told him that if bankruptcy law was easy, he wouldn't have came to me.
Sorry for the seriousness of this post. There's just no fun way to explain bankruptcy...