When you file for bankruptcy, no one swoops in to pay your creditors on your behalf. What happens depends on which chapter you file. In a Chapter 7 case, a court-appointed trustee sells your non-exempt property and distributes the proceeds to creditors in a priority order set by federal law. In a Chapter 13 case, you keep your property and pay creditors from your future income over three to five years. Whatever qualifying debt is left after that is discharged, and the creditor absorbs the loss. Co-signers and joint account holders, however, stay on the hook for anything you don’t pay.
The moment the petition is filed, the automatic stay stops collection activity: lawsuits, garnishments, collector calls, and foreclosures must pause while the case is pending.1Office of the Law Revision Counsel. 11 U.S. Code 362 – Automatic Stay That gives the process room to work, but it doesn’t settle who ultimately pays what. That answer depends on the chapter.
Chapter 7: The Trustee Sells Non-Exempt Property
Filing a Chapter 7 case creates a bankruptcy estate that includes essentially all of your property and financial interests as of the filing date.2Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate A court-appointed trustee takes control of the estate, reviews your assets, and identifies anything that can be sold to raise money for creditors.3Office of the Law Revision Counsel. 11 USC 704 – Duties of Trustee
Most filers don’t actually lose much. Exemptions let you shield certain property from the trustee. Under the federal exemption system, you can protect up to $31,575 of home equity, up to $5,025 in a vehicle, and up to $16,850 total in household goods, with a per-item cap of $800. There is also a wildcard exemption of $1,675, plus up to $15,800 of any unused homestead amount.4Office of the Law Revision Counsel. 11 USC 522 – Exemptions States can require you to use their own exemption system instead, and those amounts vary widely. Some states protect unlimited home equity; others offer no homestead protection at all.
Anything the trustee does sell goes to creditors in a strict order. Domestic support obligations like child support and alimony are paid first, followed by certain tax debts and the administrative costs of the bankruptcy itself.5Office of the Law Revision Counsel. 11 USC 507 – Priorities General unsecured creditors — credit card companies, medical providers, personal lenders — sit near the bottom. In many Chapter 7 cases there is nothing left for them, and in a “no-asset” case they receive nothing at all.
Whatever qualifying debt remains after the trustee finishes is wiped out by the discharge order. The creditor cannot pursue you for it, and must write off the balance.
Chapter 13: You Pay From Future Income
Chapter 13 works differently. You keep your property and propose a plan to repay some or all of what you owe over three to five years.6Office of the Law Revision Counsel. 11 USC 1322 – Contents of Plan The plan typically devotes all of your projected disposable income — what’s left after necessary living expenses — to creditors. It also must guarantee creditors at least as much as they would have received if your non-exempt assets had been sold in a Chapter 7.
You send a monthly payment to a standing trustee, who distributes the money to creditors according to the plan. The trustee keeps a fee of up to 10 percent of what you pay in.7Office of the Law Revision Counsel. 28 USC 586 – Duties and Supervision by Attorney General If your monthly payment is $800, as much as $80 of that may cover the trustee rather than reach your creditors. At the end of the plan, any remaining qualifying unsecured balance is discharged.
People often choose Chapter 13 to catch up on mortgage arrears, protect a co-signer, or hold on to property that a Chapter 7 trustee would otherwise sell.
Creditors Absorb the Rest
When the court issues the discharge order, your personal obligation on any remaining qualifying debt is permanently cancelled. The order acts as a court injunction barring creditors from ever trying to collect that debt from you — no more calls, letters, lawsuits, or garnishments.8Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge In a Chapter 7 case the discharge typically arrives about three to four months after filing.9Office of the Law Revision Counsel. 11 USC 727 – Discharge
The creditor writes off the discharged balance as a loss. Unsecured lenders like credit card companies and medical providers treat this as a cost of doing business and price the risk into the interest rates and fees they charge all borrowers. General unsecured creditors often recover pennies on the dollar through the bankruptcy, or nothing.
Co-Signers and Joint Debtors Still Owe
Your discharge protects you. It does not release anyone else who signed for the debt. A co-signer, joint account holder, or guarantor remains fully liable for the unpaid balance.10Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge If a parent co-signed a $15,000 personal loan and the child files bankruptcy, the lender can turn to the parent for the full remaining balance and use lawsuits, wage garnishments, and bank levies to collect.
Chapter 13 Pauses Collection Against Co-Signers
Chapter 13 adds a protection that Chapter 7 does not. When you file under Chapter 13, a special co-debtor stay automatically shields anyone liable with you on a consumer debt. The creditor cannot contact or sue your co-signer while the case is active.11Office of the Law Revision Counsel. 11 USC 1301 – Stay of Action Against Codebtor
This protection has limits. A creditor can ask the court to lift the stay if your plan does not propose to pay the co-signed debt, if the co-signer actually received the benefit of the loan, or if the creditor would be irreparably harmed by waiting. The stay also ends if your case is dismissed or converted to Chapter 7. Once it lifts and dischargeable debt remains unpaid, the creditor can pursue the co-signer for the rest.
Debts Bankruptcy Does Not Erase
Some debts stay with you no matter which chapter you file. Federal law carves these out of the discharge, so you remain personally responsible for them even after the case closes.12Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge The most common examples:
- Domestic support obligations, including child support and alimony.
- Most recent income taxes, and any tax where a return was never filed or was filed fraudulently.
- Student loans, unless you file a separate court action and prove that repayment would be an undue hardship on you and your dependents — a high bar requiring proof that you cannot maintain a minimal standard of living while repaying and that your situation is unlikely to improve.
- Debts obtained by fraud or false representations, including luxury purchases over $500 made within 90 days of filing and cash advances over $750 taken within 70 days, which are presumed nondischargeable.
- Debts for death or personal injury caused by driving while intoxicated.
- Debts arising from willful and malicious injury to another person or their property.
- Most criminal fines and other government-imposed penalties.
If most of what you owe falls into these categories, bankruptcy may not deliver the relief you’re expecting. Knowing which of your debts are dischargeable before you file is worth the time.
Secured Debts: Keep Paying or Give the Property Back
Bankruptcy does not strip a lender’s lien on property that secures a loan. If you want to keep a car or a home, you have to keep paying for it. In Chapter 7 you generally have three options.
Reaffirmation
You can sign a reaffirmation agreement, essentially a new contract agreeing to stay personally liable for the debt despite the bankruptcy. The agreement is filed with the court, and if you don’t have an attorney, a judge must approve it after finding it won’t create an undue hardship.13Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge You can cancel the agreement any time before the discharge is entered, or within 60 days after it is filed, whichever is later. The upside is that ongoing payments are reported to credit bureaus and can help you rebuild. The risk is real: if you later fall behind, the lender can repossess and sue you for any deficiency, because you’ve given up discharge protection on that debt.
Redemption
For tangible personal property used primarily for personal or household purposes — most often a car — you can redeem by paying the lender the property’s current value in a single lump sum, even if you owe more than it’s worth.14Office of the Law Revision Counsel. 11 U.S. Code 722 – Redemption Owe $12,000 on a car worth $7,000? Pay the lender $7,000 and keep the car. The remaining $5,000 is discharged. The hard part is coming up with the lump sum, though some specialty lenders offer redemption financing.
Surrender
If you can’t afford the property or don’t want it, you surrender it. The lender sells the collateral and recovers what it can. In Chapter 7, any deficiency left after the sale is typically included in your discharge, so you owe nothing further. Surrender is often the cleanest option when the loan balance exceeds the property’s value.