Bankruptcy is how federal law lets a person who cannot pay their debts either wipe them out or restructure them into a court-supervised repayment plan. It runs under Title 11 of the United States Code, and here is how bankruptcy works in practice: you file a petition in federal bankruptcy court, a trustee takes over the administration of your financial affairs, creditors have to stop collecting against you, and the case ends with either a discharge of qualifying debts or a completed repayment plan.1United States Courts. Chapter 7 – Bankruptcy Basics The system is built to give an honest debtor a fresh start while giving creditors as fair a share as the debtor can realistically pay.
Instead of each creditor independently suing, calling, or garnishing your wages, every claim against you funnels into one court proceeding under one set of federal rules.2United States Courts. Bankruptcy Basics For individuals, the two paths that cover almost every case are Chapter 7 and Chapter 13.
What Filing Immediately Does: The Automatic Stay
The moment your petition is accepted by the court’s system, a federal court order called the automatic stay takes effect. Collection activity has to stop. Lawsuits pause. Wage garnishments halt. Bank levies get released. Foreclosures and repossessions freeze.3Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay No creditor needs to be individually served for this to kick in; it operates automatically on filing.
For someone with a foreclosure sale scheduled next week or a frozen bank account, the stay is the single most immediate piece of relief bankruptcy offers. A creditor who keeps collecting after being notified faces real exposure: the debtor can recover actual damages, attorney’s fees, and costs, and in egregious cases punitive damages on top.3Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
The stay has limits. It does not stop criminal proceedings, child support or alimony collection, paternity or custody actions, or certain tax audits. Government agencies can still enforce police and regulatory powers, and a state can still suspend a driver’s license or a professional license over unpaid support.3Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
The Two Paths for Individuals
Chapter 7: Liquidation and Discharge
Chapter 7 is the version most people picture. A trustee gathers any of your property that isn’t protected by an exemption, sells it, and distributes the proceeds to creditors. In exchange, the court discharges most of your remaining unsecured debts, meaning you are no longer legally obligated to pay them.1United States Courts. Chapter 7 – Bankruptcy Basics The case typically wraps up within a few months.
The discharge is the real prize. Once granted, creditors are permanently barred from trying to collect on the discharged debts. The court can deny a discharge if the debtor hid assets, destroyed financial records, committed fraud during the case, or already received a Chapter 7 discharge within the previous eight years.4Office of the Law Revision Counsel. 11 USC 727 – Discharge
Most individual Chapter 7 cases are “no-asset” cases. The filer’s property is either fully covered by exemptions or has too little value to make liquidation worthwhile. The trustee files a report of no distribution, creditors receive nothing, and the debtor walks out with the debts gone and the property intact.
Chapter 13: A Three-to-Five-Year Repayment Plan
Chapter 13 keeps your property but requires work. You propose a repayment plan and send monthly payments to a trustee, who distributes them to creditors over three to five years.5United States Courts. Chapter 13 – Bankruptcy Basics At the end, qualifying remaining debts are discharged.6Office of the Law Revision Counsel. 11 USC 1328 – Discharge
Plan length depends on income. If your household income is below your state’s median for your household size, the plan can be as short as three years. At or above the median, it runs up to five.7Office of the Law Revision Counsel. 11 USC 1322 – Contents of Plan
Chapter 13 is especially useful if you are behind on a mortgage or car loan. The plan lets you catch up on missed payments over time while keeping the property, which Chapter 7 cannot do.5United States Courts. Chapter 13 – Bankruptcy Basics You also keep all your property regardless of its value, as long as you fund the plan adequately. Chapter 13 also discharges a slightly broader set of debts, including certain property settlement obligations from divorce that would survive a Chapter 7.6Office of the Law Revision Counsel. 11 USC 1328 – Discharge
Do You Qualify for Chapter 7? The Means Test
You cannot simply pick Chapter 7. Federal law requires individuals whose debts are primarily consumer debts to pass a means test first.8Office of the Law Revision Counsel. 11 USC 707 – Dismissal of a Case or Conversion The test exists to steer filers who can afford to repay some portion of their debts toward Chapter 13.
Step one compares your average monthly income over the previous six months to the median family income for a household your size in your state. The U.S. Trustee Program publishes updated figures based on Census Bureau data, with the current update applying to cases filed on or after April 1, 2026.9U.S. Department of Justice. Means Testing Below median, you pass and Chapter 7 is available.
Above median, the test moves to a second calculation. The court subtracts certain allowed expenses from your income to find your monthly disposable income, then multiplies that figure by 60. If the result is less than $10,275, you still qualify. If it is more than $17,150, the court presumes your filing is an abuse of Chapter 7. Amounts in between trigger a more detailed comparison against your total unsecured debt.8Office of the Law Revision Counsel. 11 USC 707 – Dismissal of a Case or Conversion
Disabled veterans whose debts were primarily incurred during active duty are exempt from the means test.
What Property You Get to Keep
Exemptions decide which property is off-limits to the trustee. Every state has its own exemption rules, and some states also let filers choose a federal exemption set instead. Exemptions are the reason most Chapter 7 cases are no-asset cases: if everything you own fits within the limits, the trustee has nothing to sell.
For cases filed between April 1, 2025 and March 31, 2028, the federal exemptions include up to $31,575 in home equity (doubled for married couples filing jointly), up to $4,450 in one motor vehicle, up to $14,875 total in household goods with a $700 cap per item, up to $1,675 in any property of your choosing plus up to $15,800 of any unused homestead exemption as a wildcard, and full protection for Social Security, pensions, and similar retirement benefits.10Office of the Law Revision Counsel. 11 USC 522 – Exemptions These amounts are adjusted every three years.
Many states offer significantly higher exemptions, particularly for home equity, and a handful (including Texas and Florida) allow unlimited homestead exemptions under state law. Checking your state’s exemption schedule is one of the most consequential steps in deciding whether Chapter 7 works for you.
Debts Bankruptcy Does Not Erase
This is where people get blindsided. Federal law lists specific categories of debt that cannot be discharged:11Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge
- Child support and alimony obligations.
- Recent income tax debts, taxes for years in which no return was filed, and taxes involving fraud.
- Student loans, unless you separately prove to the court that repayment would impose an “undue hardship,” a standard most courts interpret strictly.
- Debts obtained through false pretenses, fraudulent written statements, or embezzlement.
- Debts for willful and malicious injury to another person or their property.
- Criminal fines, restitution orders, and most government penalties.
- Debts for death or personal injury caused by driving under the influence.
Some exclusions are automatic. Tax debts and student loans survive without the creditor doing anything. For fraud and intentional-harm claims, a creditor typically has to file a separate action within the bankruptcy case to establish the debt as nondischargeable, and missing that deadline can result in the debt being discharged by default.
What You Have to Do
Filing a bankruptcy case is not just paperwork. The code imposes mandatory requirements before and after filing, and skipping any of them can get your case dismissed.
Credit Counseling Before You File
Before filing, you must complete a credit counseling session with a nonprofit agency approved by the U.S. Trustee’s office, taken within 180 days before the petition.12Office of the Law Revision Counsel. 11 USC 109 – Who May Be a Debtor Phone and internet sessions count. You get a certificate on completion and file it with your petition. Counseling taken more than 180 days before filing is expired and has to be redone.
Limited exceptions apply for people with disabilities, those on active military duty in a combat zone, and situations where no approved agency can provide timely services in your district.12Office of the Law Revision Counsel. 11 USC 109 – Who May Be a Debtor
The Documents You File
With the petition you have to submit a detailed set of financial disclosures: a list of all creditors, a schedule of every asset and liability, a statement of your income and expenses, copies of pay stubs from the previous 60 days, and a statement of any anticipated income changes over the next year.13Office of the Law Revision Counsel. 11 USC 521 – Debtor’s Duties Incomplete or inaccurate filings can delay or derail your case.
The 341 Meeting of Creditors
A reasonable time after filing, the U.S. Trustee schedules a meeting of creditors, often called the “341 meeting” after the statute requiring it.14Office of the Law Revision Counsel. 11 USC 341 – Meetings of Creditors and Equity Security Holders Creditors rarely show up. The meeting is primarily between you and the trustee, who asks questions under oath about your finances and the accuracy of your paperwork. In Chapter 7, the trustee also has to make sure you understand the consequences of a discharge, your right to file under a different chapter, and what it means to reaffirm a debt. The judge does not attend. For straightforward consumer cases, the meeting often takes less than ten minutes.
Financial Management Course After You File
Before the court will grant a discharge, you have to complete a separate financial management course, sometimes called debtor education. This is distinct from the pre-filing credit counseling, and both are mandatory. The course covers budgeting, money management, and responsible use of credit. Fees for the two courses typically run between $35 and $100 each.
What It Costs
The court filing fee is $338 for Chapter 7 and $313 for Chapter 13. Courts can allow installment payments or, in Chapter 7, waive the fee entirely for filers with income below 150 percent of the federal poverty line.
Attorney fees are separate and usually larger. A straightforward Chapter 7 generally runs $1,200 to $2,500 in attorney fees. Chapter 13 cases tend to range from $2,500 to $6,000 or more because of the ongoing plan administration, though in Chapter 13 the attorney fees are often folded into the repayment plan rather than paid upfront. Filing without a lawyer (filing “pro se”) is legal but risky, especially in Chapter 13, where the plan has to satisfy detailed statutory requirements.
What Happens to Your Credit
A bankruptcy filing can appear on your credit report for up to ten years from the date the court enters the order for relief.15Office of the Law Revision Counsel. 15 USC 1681c – Requirements Relating to Information Contained in Consumer Reports In practice, the three major credit bureaus remove Chapter 13 cases after seven years, though the statute permits reporting for the full ten. The hit to your score is severe at first and diminishes over time.
By the time most people seriously consider filing, their credit is already damaged from missed payments, collections, and judgments. Bankruptcy replaces that rolling damage with a single event that has a defined endpoint. Many filers qualify for secured credit cards within months of discharge and conventional credit within two to three years, provided they manage their finances carefully afterward.