Bankruptcy works by using a federal court process to either erase your qualifying debts or restructure them into a court-supervised repayment plan. You file a petition, an impartial trustee reviews your finances, collection activity stops immediately, and the case ends with a discharge order that legally forgives the debts the law allows to be forgiven. Which path you take, what you keep, and what survives the process depends on your income, your assets, and the type of debt you owe.
The Two Main Paths: Chapter 7 and Chapter 13
Almost every individual bankruptcy is filed under one of two chapters of the federal Bankruptcy Code.
Chapter 7 is the liquidation path. A trustee reviews what you own, sells anything not protected by an exemption, and pays creditors from the proceeds. In return, most of your remaining qualifying debts are permanently erased. Start to finish, a Chapter 7 case usually runs three to four months.
Chapter 13 is the repayment path. You keep your property and propose a plan to pay creditors over three years (if your income is below your state’s median) or five years (if it’s above, which is also the absolute maximum). The plan lets you catch up on missed mortgage or car payments while paying unsecured creditors a portion of what they’re owed. To be eligible, your unsecured debts cannot exceed $465,275 and your secured debts cannot exceed $1,395,875.1United States Courts. Chapter 13 – Bankruptcy Basics
A third option, Chapter 11, is primarily used by businesses reorganizing while continuing to operate, and by individuals whose debts exceed the Chapter 13 limits. Small businesses can use a streamlined version called Subchapter V if their debts don’t exceed $3,024,725.2U.S. Department of Justice. Subchapter V
Do You Qualify? The Means Test
The means test decides whether you can file Chapter 7 or must file Chapter 13 instead. It runs in two steps.
First, your average monthly income over the six months before filing is compared to the median income for a household your size in your state. Below the median, you pass automatically.
Above the median, the test moves to step two: allowed living expenses (standardized amounts set by the IRS for food, clothing, housing, and transportation) are subtracted from your income. If what’s left is too low to fund a meaningful repayment plan, you still qualify for Chapter 7. If not, the court will direct you toward Chapter 13.
What Happens the Moment You File
The instant your petition is filed, a court order called the automatic stay takes effect. It stops most collection activity against you: lawsuits, wage garnishments, foreclosure proceedings, and direct contact from creditors by phone or mail all have to pause while the court works through your case.3Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
The stay has limits. Criminal proceedings continue. Child support and alimony collection continues. Tax authorities can still audit you, demand unfiled returns, and make assessments, though actual collection generally pauses. If you had a prior bankruptcy dismissed within the last year, the stay in your new case is shortened or may not apply at all without a court order.
The Paperwork You Have to Turn Over
Bankruptcy is a full financial disclosure. Before or shortly after filing, you assemble:
- A complete list of everyone you owe money to, with addresses and exact balances.
- Pay stubs from the 60 days before you file, plus your most recent federal tax return.
- A schedule listing everything you own, from real estate and vehicles down to household goods.
- A schedule identifying which of those assets you’re claiming as exempt.
- Schedules of your current monthly income and monthly living expenses.
- A Statement of Financial Affairs detailing recent transactions, property transfers, and large payments you’ve made to any creditor in the months before filing.
The Statement of Financial Affairs matters because the court uses it to spot whether you paid certain creditors preferentially before filing. Inaccurate or incomplete disclosures can get your case dismissed or, if intentional, lead to federal fraud charges.
Federal law also requires two courses. You must complete a credit counseling session from a U.S. Trustee-approved agency before filing, and the certificate is only valid for 180 days. After filing, you must complete a personal financial management (debtor education) course, with the certificate filed within 60 days after your creditors’ meeting is first scheduled. Your debts cannot be discharged until both certificates are on file.4U.S. Courts. Credit Counseling and Debtor Education Courses
The Trustee and the Meeting of Creditors
Every case is assigned a trustee, an impartial official who manages it on behalf of creditors. In Chapter 7, the trustee identifies and sells non-exempt assets and distributes the proceeds. In Chapter 13, the trustee collects your monthly plan payments and pays creditors according to the approved schedule. The trustee is not your advocate and is not the judge.
Roughly four to six weeks after you file, you attend a meeting of creditors, also called a 341 meeting. Despite the name, creditors rarely show up. The trustee runs it, asking you questions under oath about your disclosures, assets, and debts. Bring a government-issued photo ID and proof of your Social Security number. Most meetings last 10 to 15 minutes. Because you’re under oath, accuracy is not optional.
The trustee also has the power to reverse certain payments you made before filing if they favored one creditor over others. Regular creditors can be reached back 90 days; payments to “insiders” like relatives or close business associates can be reached back a full year.
What You Get to Keep: Exemptions
Exemptions are the rules that decide which property is protected from the trustee. Every state has its own list, and some states let you choose between the state list and a separate federal list. Common categories include your home, vehicle, household furnishings, work tools, and retirement accounts.
To use a particular state’s exemptions, you generally must have lived there for at least 730 days before filing. If you moved during that window, the exemptions from the state where you lived for most of the 180 days before that two-year period apply instead. If neither state’s rules would cover you, you can fall back on the federal list.5Office of the Law Revision Counsel. 11 USC 522 – Exemptions
The homestead exemption, which protects equity in your primary residence, varies dramatically by state, from no protection at all up to unlimited protection in a few states (with acreage caps). Federal law imposes its own ceiling: if you acquired your home within 1,215 days before filing, the homestead exemption is capped at $214,000 no matter what your state allows.5Office of the Law Revision Counsel. 11 USC 522 – Exemptions
Retirement accounts get strong protection. Employer-sponsored plans, including 401(k)s, 403(b)s, and pensions, are shielded without a dollar cap. Traditional and Roth IRAs are also protected, but with a combined cap of $1,711,975 per person (effective through 2028). Once you withdraw funds, those dollars lose their bankruptcy protection.
Keeping Collateral: Reaffirmation Agreements
If you want to keep property that secures a debt, like a financed car, you can sign a reaffirmation agreement. This is a binding contract in which you agree to stay personally responsible for that specific debt despite the bankruptcy, and the creditor agrees not to repossess as long as you keep paying.
Reaffirmation agreements must be filed with the court no later than 60 days after the first date set for your meeting of creditors. You can cancel any time before your discharge is entered, or within 60 days after the agreement is filed, whichever is later. If you weren’t represented by an attorney when you signed, the court has to approve the deal before it takes effect. Reaffirming means giving up the discharge for that debt, so it’s a decision worth pausing on.
What Gets Erased: The Discharge
The discharge is the court order that permanently eliminates your personal liability for qualifying debts. Once it issues, discharged creditors are legally barred from ever trying to collect from you again.
In Chapter 7, the discharge typically arrives 60 to 90 days after the creditors’ meeting, assuming your debtor education certificate is on file and no creditor has objected. In Chapter 13, the discharge comes after you complete every payment under your three-to-five-year plan. If you fall behind and can’t catch up, the court can dismiss the case, which means no discharge and no more automatic stay. In some situations you can modify your plan, convert to Chapter 7 if you now pass the means test, or request a hardship discharge if creditors have already been paid at least what they would have received in a Chapter 7 liquidation.
Debts That Survive Bankruptcy
Bankruptcy doesn’t touch everything. Federal law lists categories of debt that remain your responsibility even after discharge:6Office of the Law Revision Counsel. 11 US Code 523 – Exceptions to Discharge
- Child support and alimony.
- Recent income taxes, taxes for years you didn’t file a return, and any tax involving fraud or willful evasion.
- Federal and private student loans, unless you win a separate court proceeding proving undue hardship, a standard that is difficult to meet.
- Debts obtained through fraud, false pretenses, or a materially false financial statement.
- Debts for death or personal injury caused by driving while intoxicated.
- Most criminal fines, restitution, and government penalties.
- Debts to creditors you failed to list, if they didn’t learn about the case in time to participate.
A creditor who thinks a debt should not be discharged can file an adversary proceeding. For fraud, embezzlement, or willful injury claims, the creditor has 60 days after the first date set for the meeting of creditors to file. Miss it and the debt is discharged. For other categories like taxes and student loans, there is no deadline.7Legal Information Institute. Federal Rules of Bankruptcy Procedure – Rule 4007 – Determining Whether a Debt Is Dischargeable
One thing bankruptcy does not do is create a tax bill. Debts canceled through bankruptcy are excluded from your gross income, unlike most other forms of debt forgiveness.8Internal Revenue Service. Publication 908 – Bankruptcy Tax Guide
What It Costs to File
The court filing fee is $338 for Chapter 7 and $313 for Chapter 13. If you can’t afford it, you can ask to pay in installments or apply for a fee waiver.
Attorney fees are the larger cost. Chapter 7 representation typically runs $1,000 to $3,000. Chapter 13 commonly runs $2,500 to $5,000, depending on complexity and location. You can file without a lawyer, but the forms and procedural rules are strict, and errors can lead to dismissal, loss of assets, or loss of your right to a discharge.
What It Does to Your Credit
A bankruptcy filing stays on your credit report for up to 10 years from the filing date, whether Chapter 7 or Chapter 13.9Consumer Financial Protection Bureau. How Long Does a Bankruptcy Appear on Credit Reports? The initial score drop is significant, but the impact fades as you rebuild positive credit history.
Mortgage lenders impose waiting periods before you can borrow again:
- FHA loans: two years after a Chapter 7 discharge. After Chapter 13, you can apply after 12 months of on-time plan payments with court approval.10U.S. Department of Housing and Urban Development. How Does a Bankruptcy Affect a Borrowers Eligibility for an FHA Mortgage
- Conventional loans through Fannie Mae: four years after a Chapter 7 discharge, or two years with documented extenuating circumstances.11Fannie Mae. Significant Derogatory Credit Events – Waiting Periods and Re-Establishing Credit
- VA loans: two years after Chapter 7. After Chapter 13, you can apply after 12 months of on-time plan payments.
Filing Again Later
If you’ve already received a bankruptcy discharge, federal law sets minimum waits before you can receive another one, measured from the earlier filing date to the new filing date:12United States Courts. Discharge in Bankruptcy – Bankruptcy Basics
- Chapter 7 after a prior Chapter 7: eight years.
- Chapter 7 after a prior Chapter 13: six years, unless you paid unsecured creditors in full or at least 70% in good faith.
- Chapter 13 after a prior Chapter 7 or 11: four years.
- Chapter 13 after a prior Chapter 13: two years.
You can technically file a new case before these periods expire, but the court will not grant a discharge, and courts closely scrutinize repeat filings for bad faith.