Who pays debts after bankruptcy depends on the chapter filed, the type of debt, and whether anyone else signed for it. Some debts are paid from the sale of the filer’s non-exempt property. Some are repaid gradually from future income under a court-approved plan. Some are erased entirely, so no one pays and the creditor absorbs the loss. And some survive the case completely, leaving the filer, a co-signer, or both still on the hook.
Chapter 7: Creditors Get Paid From Sold Assets, If There Are Any
In a Chapter 7 case, a court-appointed trustee takes control of the debtor’s non-exempt property, which together forms the bankruptcy estate under 11 U.S.C. § 541.1Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate The trustee sells those assets and uses the proceeds to pay creditors.2Office of the Law Revision Counsel. 11 USC 704 – Duties of Trustee
In many Chapter 7 cases, though, nobody gets paid. These are “no-asset” cases: the debtor’s property falls entirely within allowed exemptions, so there’s nothing for the trustee to sell, and unsecured creditors receive zero. The debts are still discharged; the creditors just eat the loss.
When assets are available, the trustee distributes proceeds in a strict order set by 11 U.S.C. § 507. Priority claims come first: domestic support obligations like child support and alimony, then administrative expenses of the bankruptcy case, then certain employee wages and tax debts.3Office of the Law Revision Counsel. 11 US Code 507 – Priorities General unsecured creditors — credit card companies, medical providers, personal lenders — come last.4Office of the Law Revision Counsel. 11 USC 726 – Distribution of Property of the Estate If money runs out mid-category, everyone in that group gets a proportional share.
What Property the Debtor Keeps
Federal exemptions shield certain property from the trustee. As of April 1, 2025, the amounts in effect for cases filed through early 2028 include:
- Homestead: up to $31,575 in equity in your primary residence
- Motor vehicle: up to $5,025 in one vehicle
- Wildcard: up to $1,675 in any property, plus up to $15,800 of any unused portion of the homestead exemption
These figures come from a Judicial Conference adjustment effective April 1, 2025.5Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases Many states have their own exemption lists, and some let you choose between federal and state. Protection varies widely: some states offer unlimited homestead exemptions, others far less than the federal amounts.
When an asset would cost more to sell than it’s worth, or when liens eat up all the equity, the trustee can abandon it back to the debtor under 11 U.S.C. § 554.6Office of the Law Revision Counsel. 11 US Code 554 – Abandonment of Property of the Estate Anything you listed in your filing that the trustee never dealt with is also considered abandoned back to you when the case closes.
Chapter 13: The Debtor Pays From Future Income
Chapter 13 is different. Instead of selling assets, the debtor keeps their property and pays creditors from wages over three to five years under 11 U.S.C. § 1322.7Office of the Law Revision Counsel. 11 USC 1322 – Contents of Plan Household income below the state median allows a three-year plan, though a court can extend it to five for cause. Above-median income triggers the full five years.
Your monthly payment is based on disposable income: what’s left after reasonable living expenses, calculated using IRS national and local standards for things like food, housing, and transportation.8Internal Revenue Service. National Standards: Food, Clothing and Other Items Priority debts like back taxes and child support generally have to be paid in full through the plan. General unsecured creditors often receive only a fraction of what they’re owed. When you finish all plan payments, remaining eligible unsecured balances are discharged.
Debts That Get Erased: The Discharge
The goal of most bankruptcy filings is a discharge — a court order that permanently eliminates the debtor’s legal obligation to pay specific debts. Under 11 U.S.C. § 524, the discharge operates as a federal injunction barring creditors from ever attempting to collect on those debts again.9Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge No phone calls. No lawsuits. No collection letters. For discharged debts, nobody owes the money.
Debts commonly wiped out include credit card balances, medical bills, personal loans, utility arrears, and past-due rent. In Chapter 7, the discharge typically arrives about three to four months after filing. In Chapter 13, it comes only after you complete the full repayment plan. A creditor who knowingly tries to collect on a discharged debt violates the federal injunction and can be sanctioned by the court.
Debts That Survive Bankruptcy
Certain debts are considered too important to public policy to erase. Under 11 U.S.C. § 523, these remain the filer’s personal responsibility no matter which chapter is used:
- Domestic support obligations. Child support and alimony cannot be discharged and are treated as the highest-priority claims in bankruptcy.
- Most tax debts. Recent income taxes, taxes for which no return was filed, and taxes involving fraud all survive. Older income tax debts may be dischargeable if they meet specific timing requirements.
- Student loans. Federal and private student loans survive unless you can prove repaying them would cause “undue hardship” in a separate adversary proceeding within the bankruptcy case.
- Fraud-related debts. Money obtained through false pretenses, fraud, or embezzlement remains owed.
- DUI-related injury debts. Debts for death or personal injury caused by driving while intoxicated cannot be discharged.
- Criminal fines and restitution. Court-ordered penalties from criminal cases survive bankruptcy.
For these debts, creditors can resume collection once the automatic stay lifts or the case closes.10Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge
Student Loans and the Undue Hardship Test
Discharging student loans means proving undue hardship in a separate court proceeding, and the standard is demanding. Most federal courts apply the Brunner test, which requires a borrower to show three things: they cannot maintain a minimal standard of living while repaying, their financial difficulties are likely to persist for most of the repayment period, and they made good-faith efforts to repay before filing. A smaller number of courts use a broader “totality of the circumstances” approach.
In 2022, the Department of Justice introduced a standardized process for evaluating student loan discharge requests, including an attestation form that helps DOJ attorneys identify cases where discharge is appropriate.11U.S. Department of Justice. Student Loan Guidance The process is somewhat less burdensome than it used to be, but undue hardship remains a high bar.
When Co-Signers and Joint Account Holders Have to Pay
A bankruptcy discharge protects only the person who filed. If someone co-signed a loan, guaranteed the debt, or holds a joint account with the filer, that person remains fully liable for the balance. Creditors routinely redirect collection to co-signers once the primary debtor is legally off the hook. The co-signer didn’t file, so their obligation is unchanged.
Chapter 13 offers a limited safeguard through the co-debtor stay under 11 U.S.C. § 1301. While the Chapter 13 case is active, creditors generally can’t pursue a co-signer on a consumer debt. Creditors can ask the court to lift this protection if the repayment plan doesn’t propose to pay their claim, if the co-signer actually received the benefit of the loan rather than the debtor, or if leaving the stay in place would cause the creditor irreparable harm.12Office of the Law Revision Counsel. 11 US Code 1301 – Stay of Action Against Codebtor
Chapter 7 offers no co-debtor stay at all. Co-signers face immediate collection exposure the moment the primary filer’s case begins.
When the Filer Chooses to Keep Paying: Reaffirmation
Sometimes a debtor wants to keep paying a specific debt, usually to hold onto collateral like a car or a home. A reaffirmation agreement under 11 U.S.C. § 524(c) voluntarily excludes a debt from the discharge, keeping both the obligation and the property tied to it.13Office of the Law Revision Counsel. 11 US Code 524 – Effect of Discharge After signing, the debtor is committed to repaying as though the bankruptcy never happened. If they later default, the creditor can pursue them personally.
Federal law imposes several safeguards. The agreement has to be signed before discharge is entered. A represented debtor’s attorney must certify that the agreement doesn’t impose undue hardship and that the debtor understands the consequences. Without an attorney, the court itself must approve the agreement as being in the debtor’s best interest. The debtor can cancel at any time before discharge is entered, or within 60 days after the agreement is filed with the court, whichever comes later.
The Automatic Stay: What Happens the Moment You File
Before any of these outcomes plays out, filing the petition triggers the automatic stay under 11 U.S.C. § 362.14Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay It immediately halts nearly all collection activity: lawsuits, wage garnishments, foreclosures, repossessions, collection calls, and certain tax proceedings. The stay gives the court time to sort out which debts get paid, which get reduced, and which get erased.
The stay isn’t permanent. It lasts until the case is closed or dismissed, or until the property involved is no longer part of the bankruptcy estate. Creditors can also ask the court to lift the stay for specific debts, most commonly when a secured creditor wants to foreclose on property the debtor can’t afford to keep. While the stay is in effect, a creditor who knowingly violates it can face court sanctions.
Discharged Debt Is Not Taxable Income
Outside of bankruptcy, when a creditor cancels a debt of $600 or more, the forgiven amount is usually treated as taxable income. Bankruptcy is a major exception. Debts canceled as part of a Title 11 bankruptcy case are excluded from gross income entirely, so you owe no income tax on discharged debts.15Internal Revenue Service. Publication 908 (2025), Bankruptcy Tax Guide The bankruptcy exclusion takes priority over other exclusions like the insolvency exclusion.
There is a trade-off. You have to reduce certain “tax attributes” — such as net operating losses, tax credits, and the cost basis of property you own — by the amount of the canceled debt. To claim the exclusion, file Form 982 with your federal tax return, check the bankruptcy box, and enter the total canceled amount.16Internal Revenue Service. Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments Creditors will still send a Form 1099-C, but Form 982 keeps the tax bill off the discharged amount.