Bankruptcy is a federal court process. In general terms, Chapter 7 sells a person’s non-exempt property to pay creditors and can discharge eligible debts, while Chapter 13 sets up a court-approved plan to repay debts over time. Once someone files, an automatic stay generally stops most collection activity. Bankruptcy does not erase every kind of debt, it appears on credit reports for years, and it has costs.
This page describes what the chapters do in general terms, based on how the US Courts describe them. It is not advice about whether to file, and it cannot say what would happen in any one case. Federal law sets the framework, but details such as which property you can keep vary by state, and the rules change. Before deciding anything, consult a bankruptcy attorney or a nonprofit credit counselor.
The two main chapters for individuals
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Basic idea | Liquidation: a trustee sells non-exempt property, and eligible debts can be discharged | Reorganization: the filer repays debts through a court-approved plan |
| Typical length | A matter of months | A plan lasting three to five years |
| Income rules | A means test applies to filers whose income is above their state’s median | Requires regular income, and there are limits on how much debt a filer can have |
| Property | Exempt property stays with the filer; non-exempt property can be sold | The filer generally keeps property while making plan payments |
Other chapters, such as Chapter 11 and Chapter 12, serve businesses and other filers and are outside this overview.
The US Courts say Chapter 13 plans typically last three to five years. Debtors with income below their state’s median generally must complete a three-year plan unless the court approves longer, and plans cannot run longer than five years. A Chapter 13 filer can keep property and, for a homeowner, a plan may be used to stop a foreclosure and make up missed mortgage payments over time. The debt limits for Chapter 13 are set by law and updated periodically, so check the current ones with the courts or an attorney.
What the automatic stay does
When a person files, the US Courts explain, collection actions are automatically stayed. Creditors generally cannot pursue lawsuits, wage garnishments, or even telephone calls. In Chapter 13, the stay also covers co-debtors on consumer debts during the case. This relief is one of the main reasons people file.
The stay has limits. It does not stop everything, and creditors can ask the court to lift it. Secured lenders, for example, may seek permission to proceed if payments are not being kept up. Prior filings can change how the stay works. An attorney can explain how it applies to a particular case.
What a discharge can do
In Chapter 7, a discharge releases a debtor from personal liability for eligible debts, which are commonly unsecured debts such as credit card balances, many medical bills, and personal loans. After discharge, creditors holding those debts generally cannot try to collect them from the person. Which debts qualify depends on the law and the facts of the case.
What bankruptcy generally does not erase
The US Courts list certain obligations that are not discharged, including alimony and child support, certain taxes, and debts for death or personal injury caused by driving while intoxicated. Their description of Chapter 13 also lists long-term obligations like mortgages, educational loans, and criminal restitution among debts that are not discharged. Student loans in particular are generally treated differently from other debts, and any discharge involves a separate legal showing. Ask an attorney how that works where you live.
Secured debts deserve a special note. A person’s personal obligation on a secured loan can be affected, but a lender’s claim on the collateral, such as a car or home, generally continues. Stopping payments can still lead to losing the property, which is why attorneys ask carefully about every secured debt.
What happens to property
In Chapter 7, an impartial trustee reviews what the person owns. The US Courts explain that debtors may protect certain property as exempt under federal or state law, and the trustee cannot sell exempt property. What is exempt, and in what amounts, differs by state, and in some places a filer can choose between state and federal lists. Many Chapter 7 cases involve little or nothing that can be sold, but that depends on what you own and your state’s rules. In Chapter 13, you generally keep your property, and the plan must meet legal tests about what creditors receive and how much of your income goes to the plan.
How it affects credit
The Consumer Financial Protection Bureau says bankruptcies can remain on credit reports for as long as 10 years, and reporting practices are often described as shorter for Chapter 13, around seven years, measured from the filing date. A bankruptcy can lower scores, and the size of the effect depends on where your credit stood before. People can often start rebuilding credit gradually afterward by paying bills on time and keeping balances low. Waiting periods for new loans such as mortgages vary by loan type and lender, so check the current rules with a lender.
What it costs
Filing is not free.
- Court filing fees. These are set by the federal courts and are in the hundreds of dollars for a Chapter 7 case. The US Courts say individual debtors may ask to pay in installments.
- Attorney fees. These vary widely by region, chapter, and complexity. Many bankruptcy attorneys offer a first consultation free or at low cost.
- Required counseling. The US Courts say individuals must complete credit counseling from an approved agency within 180 days before filing, with limited exceptions, and a debtor education course is also required before discharge.
- Non-monetary costs. Gathering documents, a meeting with the trustee, and disclosing your finances.
Be wary of anyone offering cheap paperwork help who cannot give legal advice. Errors in filings can lead to dismissal or lost rights.
What people weigh when considering it
This is not a recommendation. In general, people look at bankruptcy when several things are true at once: unsecured debt is far beyond what they can repay, collection pressure is serious, other options such as hardship plans, credit counseling, or negotiated settlement have not worked or are not available, and the debt came from an event like medical bills, job loss, or a business failure.
It tends to help less when the main debts are the kind that generally are not discharged, such as support, certain taxes, or student loans, when the person could realistically repay with a plan, or when there is significant non-exempt property. A co-signer generally remains responsible on a debt after the filer’s Chapter 7 discharge. Courts also look closely at recent borrowing and transfers of property before a filing, and fraud has serious consequences. Waiting periods apply between filings.
Compare the alternatives first. Debt settlement is a different path with its own risks, and what to do when you can only afford minimum payments covers steps that can stabilize a tight budget. A nonprofit credit counselor can review whether a debt management plan is realistic.
Before you talk to a professional
- Gather your numbers. List debts, assets, income, and expenses. The list in choosing which debt to pay first is a good start.
- Talk to a bankruptcy attorney, and ask about your state’s exemptions, the right chapter, costs, and alternatives. A nonprofit credit counselor is another place to start.
- Avoid new large debts or favoring one creditor in the meantime. These can cause problems in a case, and an attorney can explain why.
- Keep records: pay stubs, tax returns, and bank statements.
Where this comes from
This page draws on the US Courts’ bankruptcy basics pages for Chapter 7 and Chapter 13, and the Consumer Financial Protection Bureau’s consumer guidance on how long bankruptcy appears on credit reports. It is general information only, not legal advice. Bankruptcy law, fees, limits, and exemptions change and vary by state, so check current figures with the courts and consult a bankruptcy attorney or a nonprofit credit counselor.