Bankruptcy is a federal court process that can wipe out many debts or put them into a court-supervised repayment plan.[1] It’s a serious step with lasting effects on your credit, and for some people it’s also the most realistic fresh start available.
This page explains how it works in general terms. Exemptions, costs and procedures vary by state and by court, so it isn’t a substitute for advice from a bankruptcy attorney about your situation.
- What it is
- A federal court case that discharges many debts (Chapter 7) or restructures them into a plan (Chapter 13)
- Usually considered when
- Debt is far larger than you could realistically repay in a few years
- Cost
- Court filing fee, two required courses, and usually attorney fees
- Credit impact
- Significant; can be reported for up to 10 years
- Main protection
- The automatic stay stops most collection the moment you file
Chapter 7 vs Chapter 13
The two main types of personal bankruptcy are Chapter 7 and Chapter 13:[2][3]
| Chapter 7 | Chapter 13 | |
|---|---|---|
| How it works | A trustee can sell property that isn’t protected by exemptions, and most remaining unsecured debt is discharged | You repay part or all of your debts through a court-approved plan and keep your property |
| How long | Usually a few months from filing to discharge | A plan lasting three to five years |
| Who qualifies | Income at or below your state’s median generally qualifies; above it, a more detailed means test applies | Needs regular income; there are limits on how much debt you can have |
| Your property | Exempt property is protected; many filers keep everything they own | You keep your property while you make plan payments |
| Often used for | Wiping out credit cards, medical bills and personal loans when there’s little to protect | Catching up on a mortgage or car loan to avoid foreclosure or repossession, or protecting property worth more than the exemptions |
How filing works
- Credit counseling before you file. With limited exceptions, you must complete a counseling session with an approved agency within 180 days before filing. Agencies are approved by the U.S. Trustee Program, or by the bankruptcy administrator in Alabama and North Carolina.[4][5]
- Filing the petition. You file forms listing your income, expenses, property, debts and recent financial transactions.
- The automatic stay. As soon as you file, most collection has to stop, including calls, lawsuits and wage garnishments.[2][3]
- The meeting of creditors. A few weeks after filing, you answer questions under oath at what’s called a 341 meeting. It’s run by a trustee, not a judge, and creditors may attend and ask questions.[6]
- A debtor education course must be completed before you can receive a discharge.[4]
- Discharge. The court releases you from personal liability for the discharged debts, and creditors can’t try to collect them again.
What bankruptcy can’t erase
Some debts usually survive bankruptcy, including:[7]
- Student loans, unless you prove repaying them would be an “undue hardship”[8]
- Child support and alimony
- Certain tax debts, often recent ones
- Debts from fraud, and certain fines and penalties
Secured debts work differently too. Bankruptcy can end your personal liability on a car loan or mortgage, but if you want to keep the car or house, you generally still have to pay for it.
What it costs
- Court filing fee. The fee differs between Chapter 7 and Chapter 13 and is set by the federal courts. Individual filers in either chapter can ask to pay in installments.[2][3] Chapter 7 filers with low income who can’t pay even in installments can ask to have the fee waived.[9]
- The two required courses, for a fee that can be waived or reduced for people who can’t afford it[14]
- Attorney fees, which vary by area and case complexity.
Our guide to how much it costs to file bankruptcy breaks down each cost, the current court fees, and the ways they can be lower.
How it affects your credit
A bankruptcy can be reported on your credit report for up to 10 years from filing.[10] The effect on your score is largest at first and fades over time, especially as you add new on-time payments. Many people start rebuilding soon after discharge. Our guide on rebuilding credit after bankruptcy walks through how.
Filing again
There are waiting periods between discharges. For example, you generally can’t receive a Chapter 7 discharge if you received one in a case filed within the previous eight years.[11] Different time limits apply to other combinations of Chapter 7 and Chapter 13, so check with an attorney if you’ve filed before.
When to talk to a lawyer
You’re allowed to file without a lawyer, but bankruptcy has strict rules, and mistakes in the process can affect your rights.[12] Talking to a bankruptcy attorney is especially worth it if:
- You own a home or other property with significant equity
- You’ve recently transferred property or repaid family members
- You’re being sued, or your wages are being garnished
- Your income is above your state’s median
- You run a business or have tax debts
- You want to keep a house or car you’re behind on
Some bankruptcy attorneys offer a free first consultation,[15] and if you have a low income, a local legal aid office may be able to help.[13] Our guide on filing bankruptcy without a lawyer covers the tradeoffs.
Who it might fit
Bankruptcy is usually worth understanding when your unsecured debt is large compared with your income and other options won’t realistically clear it. The Debt Audit adds a note suggesting you look into bankruptcy in two cases:
- Your minimums don’t fit your budget and your unsecured debt is large relative to a year’s take-home pay.
- Paying off would take more than about five years and your unsecured debt exceeds a year’s take-home pay.
It never recommends filing. That’s a decision for you and, ideally, an attorney. The thresholds are on How the audit works.
Red flags
- “Bankruptcy petition preparers” who give legal advice. They can type forms but can’t advise you.[12]
- Anyone telling you to run up debt or move property before filing
- Promises that all your debts will disappear
- Pressure to file without exploring alternatives
See where your numbers stand
The Debt Audit shows how long payoff would take on your own, whether counseling or consolidation fit, and when bankruptcy may be worth understanding. It takes about five minutes, and nothing you enter is stored or sent.
Run the Debt AuditFrequently asked questions
What’s the difference between Chapter 7 and Chapter 13?
Chapter 7 discharges most unsecured debts in a few months, but a trustee can sell property that isn’t protected by exemptions, and your income must qualify under the means test. Chapter 13 sets up a three-to-five-year repayment plan and lets you keep your property, which is why people behind on a mortgage or car loan often use it.
Will I lose my house or car?
Not necessarily. Exemptions protect a certain amount of equity, and many Chapter 7 filers keep everything they own. If you’re behind on payments, Chapter 13 can let you catch up over time. How it works for you depends on your state’s exemptions and your equity, so it’s worth asking an attorney.
What happens at the 341 meeting of creditors?
The trustee assigned to your case asks you questions under oath about your petition, your property and your finances. It’s run by the trustee, not a judge, and creditors may attend and ask questions.
How long does bankruptcy stay on my credit report?
A bankruptcy can be reported for up to 10 years from the filing date. Its effect on your score tends to fade over time, especially as you build new on-time payment history.
Can you file bankruptcy more than once?
Yes, but there are waiting periods between discharges. For example, a Chapter 7 discharge generally isn’t available if you received one in a case filed within the previous eight years. Other combinations have different time limits.
Can student loans be discharged in bankruptcy?
Only if you show that repaying them would be an undue hardship, which takes a separate proceeding. The Justice Department has a standardized process for federal student loans, and an attorney can tell you whether it might apply to you.
Related guides
- How to rebuild credit after bankruptcy
- Debts bankruptcy can’t erase
- Can you file bankruptcy without a lawyer?
Sources
- Bankruptcy Basics. United States Courts.
- Chapter 7: Bankruptcy Basics. United States Courts.
- Chapter 13: Bankruptcy Basics. United States Courts.
- Credit Counseling & Debtor Education Information. U.S. Trustee Program, U.S. Department of Justice.
- 11 U.S.C. § 109, Who may be a debtor. U.S. Government Publishing Office (govinfo).
- Section 341 Meeting of Creditors. U.S. Trustee Program, U.S. Department of Justice.
- 11 U.S.C. § 523, Exceptions to discharge. U.S. Government Publishing Office (govinfo).
- Student Loan Guidance. U.S. Trustee Program, U.S. Department of Justice.
- 28 U.S.C. § 1930, Bankruptcy fees. U.S. Government Publishing Office (govinfo).
- 15 U.S.C. § 1681c, Requirements relating to information contained in consumer reports. U.S. Government Publishing Office (govinfo).
- 11 U.S.C. § 727, Discharge. U.S. Government Publishing Office (govinfo).
- Filing Without an Attorney. United States Courts.
- I Need Legal Help. Legal Services Corporation.
- Frequently Asked Questions: Credit Counseling. U.S. Trustee Program, U.S. Department of Justice.
- What is a debt relief program and how do I know if I should use one? Consumer Financial Protection Bureau.