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 paid gradually from the filer’s 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, leaving the filer still personally responsible. Co-signers and joint account holders are a separate story: the discharge protects only the person who filed, so a guarantor generally remains on the hook.
Chapter 7: Creditors Are Paid From the Sale of Non-Exempt Property
In a Chapter 7 case, a court-appointed trustee takes control of the debtor’s non-exempt property, sells it, and distributes the proceeds to creditors.1Office of the Law Revision Counsel. 11 USC 704 – Duties of Trustee The assets that make up the bankruptcy estate are defined by 11 U.S.C. § 541.2Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate
In many Chapter 7 filings, though, nobody pays anything. These are “no-asset” cases: the debtor’s property falls entirely within allowed exemptions, so the trustee has nothing to sell and unsecured creditors receive zero. Federal exemptions, adjusted every three years and set by a Judicial Conference adjustment effective April 1, 2025, protect essentials.3Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases The key federal figures currently in effect:
- Up to $31,575 in equity in a primary residence (homestead)
- Up to $5,025 in one motor vehicle
- Up to $1,675 of any property, plus up to $15,800 of any unused homestead exemption (wildcard)
Many states publish their own exemption lists, and some let the filer choose between the state and federal sets. State exemptions vary widely, from unlimited homestead protection in a few states to less generous limits in others.
When the trustee does have assets to sell, the money goes out in a specific order set by 11 U.S.C. § 507 and § 726. Priority claims are paid first: domestic support obligations (child support and alimony) at the top, then the administrative expenses of the bankruptcy case itself, then certain employee wages and specific tax debts.4Office of the Law Revision Counsel. 11 US Code 507 – Priorities General unsecured creditors — credit card issuers, medical providers, personal lenders — come only after every priority claim has been satisfied.5Office of the Law Revision Counsel. 11 USC 726 – Distribution of Property of the Estate If the money in a category runs out before every creditor in it is paid, each creditor in that tier gets a proportional share.
Not every debtor qualifies for Chapter 7. The means test under 11 U.S.C. § 707(b) screens filers whose debts are primarily consumer debts. If household income sits at or below the state median for the filer’s family size, they generally pass. If it’s above the median and the calculation shows meaningful disposable income after allowed expenses, the court can dismiss the case or push the filer into Chapter 13.6Office of the Law Revision Counsel. 11 US Code 707 – Dismissal of a Case or Conversion
Chapter 13: The Debtor Pays From Future Income
In Chapter 13, creditors are paid out of the debtor’s future earnings under a plan lasting three to five years. The filer sends a monthly payment to a trustee, who distributes it according to 11 U.S.C. § 1322.7Office of the Law Revision Counsel. 11 USC 1322 – Contents of Plan Below-median income filers generally use a three-year plan; above-median filers run the full five years.
The plan payment is based on disposable income, meaning what remains after reasonable living expenses calculated using IRS national and local standards for categories like food, clothing, housing, and transportation.8Internal Revenue Service. National Standards: Food, Clothing and Other Items Priority debts such as back taxes and child support typically must be paid in full through the plan. Unsecured creditors, by contrast, often collect only cents on the dollar. When the debtor finishes the plan payments, any remaining eligible unsecured balances are discharged.
Debts That Get Erased So Nobody Pays
The point of most bankruptcies is discharge: a court order under 11 U.S.C. § 524 that permanently wipes out the debtor’s obligation to pay listed debts.9Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge The discharge acts as a federal injunction. No phone calls, no lawsuits, no collection letters. For debts covered by the discharge, neither the debtor nor anyone else owes the money; the creditor takes the loss.
The debts most commonly wiped out include credit card balances, medical bills, personal loans, utility arrears, and past-due rent. A Chapter 7 discharge typically arrives about three to four months after filing. A Chapter 13 discharge comes only after the filer completes the full repayment plan. A creditor who knowingly tries to collect on a discharged debt violates the injunction and can be sanctioned by the court.
Debts the Filer Still Has to Pay
Several categories of debt are considered too important to public policy to erase. Under 11 U.S.C. § 523, these survive the case and remain the filer’s personal responsibility once the bankruptcy ends.10Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge The main ones:
- Domestic support obligations. Child support and alimony are not dischargeable, and they sit at the top of the priority ladder within the case itself.
- Most tax debts. Recent income taxes, taxes for which no return was filed, and taxes involving fraud all survive. Older income tax debts can sometimes be discharged if they meet specific timing rules.
- Student loans, federal and private. They survive unless the borrower can prove repayment would cause “undue hardship,” which requires filing a separate adversary proceeding inside the bankruptcy case.
- Fraud-related debts. Money obtained through false pretenses, fraud, or embezzlement stays 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 in criminal cases survive.
Once the automatic stay lifts or the case closes, creditors on non-dischargeable debts can start collecting again.
The Undue Hardship Standard for Student Loans
Erasing student loans requires proving undue hardship in a separate court proceeding, and the standard is demanding. Most federal courts use the Brunner test, which requires the 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. Some courts instead weigh the “totality of the circumstances,” looking at past, present, and likely future finances.
In 2022, the Department of Justice introduced a standardized process to make these evaluations more consistent, including an attestation form that helps DOJ attorneys identify cases where discharge is appropriate.11U.S. Department of Justice. Student Loan Guidance The new guidance has eased the process somewhat, but the hardship bar remains high.
Reaffirmation: Choosing to Keep Paying a Dischargeable Debt
A filer can also decide to keep paying a debt that would otherwise be wiped out, usually to hold onto collateral like a car or a home. A reaffirmation agreement under 11 U.S.C. § 524(c) voluntarily excludes that debt from the discharge, so the filer remains personally liable and the creditor can pursue them again if they later default.12Office of the Law Revision Counsel. 11 US Code 524 – Effect of Discharge
The agreement must be signed before the discharge is entered. If the filer has an attorney, the attorney must certify that the deal doesn’t impose undue hardship and that the client understands the consequences; without an attorney, the court itself has to approve the agreement as being in the filer’s best interest. The filer can cancel a reaffirmation at any time before discharge is entered, or within 60 days after the agreement is filed with the court, whichever comes later.
When Co-Signers and Joint Account Holders Have to Pay
A discharge protects only the person who filed. Anyone who co-signed a loan, guaranteed a debt, or holds a joint account with the filer remains fully liable for the balance. Creditors routinely redirect collection efforts to co-signers once the primary debtor’s case takes the filer off the table. The co-signer didn’t file, so their obligation doesn’t change.
Chapter 13 offers a limited shield through the co-debtor stay under 11 U.S.C. § 1301. While the Chapter 13 case is active, creditors generally cannot pursue a co-signer on a consumer debt.13Office of the Law Revision Counsel. 11 USC 1301 – Stay of Action Against Codebtor A creditor can ask the court to lift that protection if the plan doesn’t propose to pay their claim, if the co-signer (rather than the debtor) actually received the benefit of the loan, or if leaving the stay in place would cause the creditor irreparable harm. Chapter 7 offers no co-debtor stay at all, so co-signers are exposed as soon as the case begins.
Is Discharged Debt Taxed as Income?
Outside of bankruptcy, a creditor who cancels $600 or more of debt normally hands the borrower a Form 1099-C and the forgiven amount counts as taxable income. Bankruptcy is a specific exception. Debts canceled in a Title 11 case are completely excluded from gross income, so the filer owes no income tax on the discharged amount.14Internal Revenue Service. Publication 908 (2025), Bankruptcy Tax Guide The bankruptcy exclusion takes priority over other exclusions, including the insolvency exclusion that applies outside of bankruptcy.
There is a trade-off. The filer has to reduce certain “tax attributes,” such as net operating losses, tax credits, and the cost basis of property they own, by the amount of canceled debt. Claiming the exclusion is done on Form 982, filed with the federal return, checking the bankruptcy box and entering the total canceled amount.15Internal Revenue Service. Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments Creditors will still send Form 1099-C, but properly filing Form 982 prevents the canceled amount from being taxed.
The Automatic Stay While the Case Is Pending
Between filing and discharge, none of the paying, erasing, or surviving happens in a vacuum. The moment a petition is filed, the automatic stay under 11 U.S.C. § 362 halts nearly all collection activity: lawsuits, wage garnishments, foreclosures, repossessions, collection calls, and certain tax proceedings.16Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay It stays in place until the case closes, the case is dismissed, or the property involved leaves the bankruptcy estate. Creditors can also petition the court to lift the stay for a specific debt, most often a secured lender wanting to foreclose on collateral the debtor can’t keep. Any creditor who knowingly violates the stay while it is in effect can face court sanctions.