Bankruptcy is a federal legal process that helps people and businesses resolve debts they cannot pay. Depending on the chapter you file under, it can wipe out most debts entirely, set up a court-supervised repayment plan lasting several years, or let a struggling company restructure while continuing to operate. Every case moves through the U.S. Bankruptcy Court system under the federal Bankruptcy Code, which is designed to give honest debtors a genuine fresh start while treating creditors fairly.
The process is powerful, but it isn’t a blank slate. Some debts survive it, filing costs money, and the credit consequences last for years. Understanding what bankruptcy actually does, and doesn’t do, is the first step in deciding whether it fits your situation.
The Main Types of Bankruptcy
The Bankruptcy Code offers several paths, each built for a different financial situation. The right chapter depends on your income, the kind of debt you carry, and whether you want to liquidate assets or repay over time.
Chapter 7: Liquidation
Chapter 7 is the most common form of individual bankruptcy. A court-appointed trustee collects your non-exempt property, sells what can be sold, and distributes the proceeds to creditors. In practice, most individual Chapter 7 cases are “no-asset” cases, meaning the filer has little or nothing to liquidate once exemptions are applied. The court filing fee is $338. A typical Chapter 7 case wraps up in roughly three to four months, making it the fastest path to a discharge.
Chapter 13: Repayment Plan
If you have steady income and want to keep your property, Chapter 13 lets you propose a court-approved repayment plan lasting three to five years. The length depends on your income relative to your state’s median: below the median, the plan runs three years; above it, generally five. You make monthly payments to a trustee, who distributes the money to creditors under the plan. The filing fee is $313. Chapter 13 is especially useful for people behind on a mortgage or car loan, because the plan can include catch-up payments that prevent foreclosure or repossession.
Chapter 11: Business Reorganization
Chapter 11 is primarily used by businesses that want to keep operating while restructuring their debts. The company stays in control of day-to-day operations as a “debtor in possession” while it proposes a reorganization plan that impaired creditors vote on. The filing fee is $1,738, reflecting the complexity involved. Individuals whose debts exceed Chapter 13’s limits sometimes file under Chapter 11 as well.
Chapter 12 and Subchapter V
Two additional options serve narrower groups. Chapter 12 is reserved for family farmers and commercial fishermen with regular annual income. It works like Chapter 13 with a three-to-five-year repayment plan, but the debt ceilings are much higher: up to $12,562,250 for farming operations and $2,568,000 for fishing operations.
Subchapter V of Chapter 11 streamlines reorganization for small businesses. After a temporary increase expired in June 2024, the debt ceiling returned to approximately $3,024,725 in total non-contingent, liquidated debts. Subchapter V eliminates many of the expensive requirements of a traditional Chapter 11: no creditors’ committee unless the court orders one, no disclosure statement requirement, and the debtor must file a plan within 90 days. At least half of the debtor’s debt must come from business activities.
Who Qualifies to File
The Means Test for Chapter 7
Not everyone can choose Chapter 7. Before filing, you must pass a “means test” that measures whether you truly lack the ability to repay. The first step compares your average monthly income over the past six months to the median income for a household of your size in your state. Below the median, you pass automatically. Above it, a second calculation subtracts allowable living expenses, and only if that math shows you have essentially no disposable income will you qualify. Filers who fail the means test are typically steered toward Chapter 13 instead. The U.S. Trustee Program publishes updated median income tables by state and household size, generally twice a year.
Required Credit Counseling and Debtor Education
Federal law requires two separate courses before you can complete a bankruptcy case. Within 180 days before filing, you must receive an individual or group credit counseling briefing from a nonprofit agency approved by the U.S. Trustee. Skip this step and the court will dismiss your case. Exceptions exist for people with disabilities, those on active military duty in a combat zone, and situations where approved agencies cannot handle the volume of requests.
The second course, often called “debtor education,” happens after you file but before you receive a discharge. It covers personal financial management, must last at least two hours, and results in a certificate you file with the court. Skip it and the court will not grant your discharge, no matter how smoothly the rest of the case went. Both courses typically cost between $10 and $100 each.
What Filing Does Immediately
The moment you file a bankruptcy petition, a legal shield called the automatic stay kicks in. Creditors must immediately stop virtually all collection activity: no more calls, no demand letters, no lawsuits, no wage garnishments, no bank levies. If a foreclosure sale is scheduled, the filing halts it. No separate court order is needed. A creditor who knowingly violates the stay can be ordered to pay your actual damages, attorney fees, and in some cases punitive damages.
The stay has limits. It does not stop criminal proceedings, and it does not block most family-law matters: child custody disputes, paternity actions, domestic violence proceedings, and the establishment or modification of child support or alimony all continue. Government agencies can still audit you for taxes, issue a notice of deficiency, or demand unfiled returns. If a commercial lease expired before you filed, the landlord can still pursue possession.
Refiling weakens the stay. If your previous case was dismissed within the past year and you file again, the stay lasts only 30 days unless the court extends it. Two or more dismissals within the past year, and the new filing may receive no automatic stay at all.
What You Keep and What You Lose
Filing creates a legal entity called the bankruptcy estate, which technically includes every property interest you hold at the moment the case begins: your home equity, vehicles, bank accounts, investments, and intangible rights like a pending lawsuit or an expected tax refund. In a Chapter 7 case, the trustee reviews this estate to determine what can be sold to pay creditors.
Exemptions keep the process from leaving you destitute. Federal law sets baseline exemption amounts, adjusted for inflation every three years. As of April 2025, the federal exemptions protect up to $31,575 in home equity, $5,025 in vehicle equity, and a $1,675 wildcard that can shield any property of your choosing. Many states have their own exemption systems, and some let you pick whichever set works better. A handful of states require you to use only their exemptions. The practical result is that most Chapter 7 filers keep everything they own because their property values fall within the exemption limits.
Debts Bankruptcy Won’t Erase
A discharge is the finish line: a permanent court order that eliminates your personal liability for covered debts and permanently bars creditors from trying to collect them. But certain categories of debt survive bankruptcy no matter which chapter you file under:
- Child support and alimony.
- Recent income taxes, taxes where no return was filed, and taxes involving fraud.
- Student loans, unless you file a separate lawsuit within the bankruptcy case and prove that repayment would impose an “undue hardship” on you and your dependents. Recent federal policy guidance has made this process somewhat more accessible, but it still requires adversarial litigation.
- Debts you obtained through fraud, false pretenses, or false financial statements, if the creditor objects.
- Debts arising from willful and malicious injury to a person or their property, if a creditor objects.
- Debts for death or personal injury caused by driving under the influence.
- Luxury purchases over $500 made within 90 days of filing, and cash advances over $750 taken within 70 days, which are presumed non-dischargeable.
- Criminal restitution and most government fines and penalties.
Debts you accidentally leave off your bankruptcy paperwork may also survive if the creditor did not learn about the case in time to participate. Complete financial disclosure matters: leaving a debt off the petition can mean you are still stuck with it after the case closes.
What Filing Costs
Court filing fees are fixed nationally: $338 for Chapter 7, $313 for Chapter 13, and $1,738 for Chapter 11. If you cannot afford the Chapter 7 fee, you can ask the court to pay in installments or, in genuine hardship, waive the fee entirely.
Attorney fees vary widely. A straightforward Chapter 7 case commonly runs $1,000 to $2,500 in legal fees. Chapter 13 fees tend to be higher because the attorney’s work stretches across the life of the plan, and courts in many districts set a presumptive fee cap. Chapter 11 fees can run into tens of thousands of dollars. Filing without an attorney is legally permitted, but bankruptcy paperwork is dense and mistakes can cost you your discharge or your property. Free or low-cost legal aid is available in many areas for filers who qualify by income. Add the two required courses at roughly $10 to $100 each, and the total out-of-pocket cost for a basic Chapter 7 with an attorney typically lands between $1,350 and $3,000.
What It Does to Your Credit and Future Borrowing
A bankruptcy filing appears on your credit report for up to ten years from the filing date. Most credit bureaus remove a completed Chapter 13 case after seven years, while Chapter 7 stays the full ten. The immediate hit to your credit score is significant, but the trajectory from there depends on what you do next. People who rebuild carefully with secured credit cards and small installment loans often see meaningful score recovery within two to three years.
The mortgage market imposes its own waiting periods. For a conventional loan backed by Fannie Mae, you generally must wait four years after a Chapter 7 discharge and two years after a Chapter 13 discharge before you can qualify. Documented extenuating circumstances, like a medical emergency or the closure of a major employer, can shorten the Chapter 7 wait to two years. Multiple filings within seven years push the waiting period to five years. FHA loans tend to have shorter waiting periods than conventional loans.
Beyond credit, a bankruptcy filing can surface in background checks for employment, rental applications, and professional licensing. These effects fade over time, but they are real.
If a Case Gets Dismissed
A bankruptcy case can be dismissed for reasons ranging from missed paperwork deadlines to failing to make Chapter 13 plan payments. Dismissal essentially rewinds the clock: you are still liable for all your debts, and creditors can immediately resume collection efforts including lawsuits, garnishments, and foreclosure.
If the dismissal is “without prejudice,” you can refile right away, but the automatic stay on your next case will be limited to 30 days unless the court extends it. A dismissal “with prejudice” bars you from refiling for a period set by the court, and in some cases prevents you from ever discharging the same debts. Federal law imposes a 180-day refiling bar when a case was dismissed after the debtor asked for dismissal to dodge a creditor’s motion for relief from the stay, or when the debtor willfully ignored court orders.