Bankruptcy

Understanding Bankruptcy

Bankruptcy is a federal legal process designed to help individuals who genuinely cannot repay their debts get a fresh financial start. It should be viewed as a last resort — but for those who truly have no other viable options, it serves an important and necessary purpose.

Since the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) passed in 2005, the filing process has become significantly more stringent. The implementation of the "means test" made it much harder for consumers to qualify for Chapter 7 — the form of bankruptcy that completely discharges most unsecured debts. As a result, the majority of consumers who file today are directed toward Chapter 13, which requires partial repayment over 3-5 years.

Before considering bankruptcy, make certain you've explored every debt relief option available to you. Many consumers we speak with believe bankruptcy is their only path forward, only to discover that debt settlement or hardship programs can resolve their debt without the severe, long-lasting consequences of a bankruptcy filing.

Chapter 13 Bankruptcy: Wage Earner's Plan

Chapter 13, also called a "wage earner's plan," enables individuals with regular income to develop a court-supervised repayment plan covering all or part of their debts over a 3-5 year period. Unlike Chapter 7, you do not get a clean slate — you will still make partial payments on your obligations for the duration of the plan.

The primary advantage of Chapter 13 is asset protection. This makes it the preferred option for homeowners who have fallen behind on mortgage payments and want to catch up, or car owners who want to retain their vehicles. The repayment plan is carefully structured around your income and necessary living expenses, and the court determines how much of your disposable income goes toward creditors each month.

Due to the means test introduced by BAPCA, the majority of consumers filing for bankruptcy today end up in Chapter 13 rather than Chapter 7. If your household income exceeds the median for your state, you will almost certainly be directed to Chapter 13 unless the detailed income calculation shows you have no disposable income after allowable expenses.

Which Debts Can (and Can't) Be Discharged

One of the most common misconceptions about bankruptcy is that it eliminates all debt. It does not. Bankruptcy divides debts into dischargeable and non-dischargeable categories, and understanding which is which is critical before filing.

Debts Bankruptcy Can Typically Eliminate

Credit card balances are the most commonly discharged debt in bankruptcy. Medical bills, personal loans, utility arrears, past-due rent, and certain older tax debts (generally income taxes more than 3 years old that meet specific criteria) can also be eliminated. If credit card debt is your primary burden, our guide on how to pay off credit card debt covers every strategy including bankruptcy alongside less severe alternatives.

Debts Bankruptcy Cannot Eliminate

Student loans are almost never dischargeable in bankruptcy (the "undue hardship" standard is extraordinarily difficult to meet). Child support, spousal support (alimony), most tax debts, court-ordered fines and restitution, and debts incurred through fraud are also non-dischargeable. If you are carrying student loan debt alongside credit card debt, bankruptcy will only address the credit cards — you'll still owe every dollar of the student loans when you come out the other side.

Secured debts like mortgages and auto loans work differently. The debt itself may be dischargeable, but the lien on the property remains. In practical terms, this means the lender can still repossess the asset even if the debt is discharged — so if you want to keep the house or car, you need to continue making payments or work out a reaffirmation agreement.

Consequences of Filing for Bankruptcy

Credit Impact

Bankruptcy is the most severe negative event that can appear on a credit report. A Chapter 7 filing remains for 10 years, Chapter 13 for 7 years. During this period, qualifying for new credit cards, mortgages, auto loans, and even apartment leases becomes significantly harder. Many lenders will not extend credit to someone with a bankruptcy on their record, and those that do will charge substantially higher interest rates. Visit our credit worthiness page for a detailed breakdown of how credit scores work and guidance on rebuilding after financial setbacks.

Public Record

Every bankruptcy filing is public record. This means potential employers, landlords, business partners, and anyone else who runs a background check can discover that you filed. Some industries and professional licenses require disclosure of bankruptcy filings. Even after the credit reporting period ends, the public record remains permanently accessible through court databases.

Cost of Filing

Bankruptcy is not free. Court filing fees alone are roughly $338 for Chapter 7 and $313 for Chapter 13. Attorney fees range from $1,000 to $3,500 or more depending on your location and the complexity of your case. You are also required to complete pre-filing credit counseling ($15-$50) and a post-filing debtor education course ($10-$50). All in, most filers spend $1,300 to $3,800 — a meaningful expense for someone already in financial distress.

Property Loss

In Chapter 7, the bankruptcy trustee can liquidate your non-exempt assets to pay creditors. Exemptions vary significantly by state — some states are far more generous than others. Generally, your primary residence (up to a certain equity value), one vehicle (up to a certain value), essential household goods, and retirement accounts are protected. But if you own significant assets like a second property, valuable collections, or large cash savings, Chapter 7 puts those at risk.

Emotional and Practical Impact

Beyond the financial consequences, bankruptcy carries real emotional weight. The public nature of the filing, the loss of control over finances during the process, and the stigma that still surrounds it can take a toll. Many of our clients who considered bankruptcy tell us that the psychological burden of the filing itself was a significant factor in their decision to pursue alternatives instead.

Life After Bankruptcy: Rebuilding Your Financial Foundation

Bankruptcy is not a financial death sentence. People do recover. But recovery takes intentional effort and patience, and understanding the timeline is important for setting realistic expectations.

Immediately after discharge, your credit score will be at or near its lowest point. Most filers see scores in the 500-550 range post-bankruptcy. The first steps toward rebuilding involve establishing new positive credit history: a secured credit card (where you deposit cash as collateral), consistent on-time payments on any remaining obligations, and careful budgeting to ensure you never end up in the same situation again.

Within 1-2 years of discharge, many people can qualify for auto loans (at higher interest rates). Within 2-4 years, FHA mortgage eligibility opens up. Conventional mortgages typically require a 4-year waiting period after Chapter 7. Full credit recovery — where the bankruptcy no longer significantly impacts lending decisions — generally takes 5-7 years of consistent positive credit behavior.

For a comprehensive breakdown of how credit scoring works and specific strategies for rebuilding, visit our credit worthiness page and read our guide on how to rebuild credit after debt relief.

When Bankruptcy Is the Right Choice

Despite its consequences, bankruptcy is the right answer for some people. If you are facing multiple lawsuits, active wage garnishment, and have no realistic ability to repay even a settled amount, the automatic stay and discharge that bankruptcy provides may be your only path to stability.

Bankruptcy tends to be the right choice when your total unsecured debt vastly exceeds your annual income with no realistic prospect of improvement, when you are being actively garnished and cannot cover basic living expenses, when creditors have obtained judgments and are pursuing asset seizure, or when you have already explored settlement and hardship options and they are not viable for your situation.

If you've experienced a financial crisis — job loss, medical emergency, or divorce — and your income has dropped dramatically with no expected recovery, bankruptcy may offer the clean break you need to rebuild. The key is making an informed decision rather than a desperate one. Understand all your debt relief options first.