What Is Bankruptcy?

Bankruptcy is a federal legal process that allows individuals and businesses to eliminate or restructure debts, providing a fresh financial start. Over 500,000 Americans file for bankruptcy each year, finding it a financial lifesaver that stops collection actions, wage garnishments, foreclosures, and repossessions through an "automatic stay" court order.

This guide explains everything you need to know about how bankruptcy works, including the differences between Chapters 7, 13, and 11, the exact costs, which debts can be eliminated, and what property can be kept. You'll also learn how to prepare before filing and steps to rebuild credit after receiving your fresh start.

What Is Bankruptcy? Complete Definition and Process

Bankruptcy works by legally breaking contracts between you and creditors, freeing you from paying many bills. Chapter 7 bankruptcy eliminates qualifying debts in four to five months, whereas Chapter 13 creates a three- to five-year repayment plan that allows you to keep all property.

The process not only frees up money for you and your family but also dramatically reduces stress and helps you weather uncertain financial times. It provides relief for those struggling with expenses such as credit card balances, medical bills, as well as the rising costs of food, utilities, rent, and other household expenses.

How Does Bankruptcy Work for Me?

Filing for bankruptcy immediately stops collection actions through the automatic stay. It can lead to a discharge of qualifying debts, offering significant financial relief. You can count on the automatic stay stopping harassing phone calls, lawsuits, wage garnishments, repossessions, evictions, and foreclosures at least temporarily, but often permanently.

If you file for Chapter 7 bankruptcy, it typically takes four to five months to receive the discharge order, which wipes out qualifying debts. A Chapter 13 bankruptcy case is complete after creditors are paid through the Chapter 13 plan over a three- to five-year period.

How the Bankruptcy Trustee Helps Creditors

The bankruptcy trustee oversees your case, verifies your paperwork, and ensures creditors receive their legally entitled share from nonexempt assets or through a repayment plan.

When you file for bankruptcy, the bankruptcy court will appoint a bankruptcy trustee to oversee your case. The trustee will verify your identity and the accuracy of your paperwork. The trustee also ensures each creditor receives the amount they're legally entitled to.

Tip. It's usually cheaper to file for bankruptcy than to continue paying creditors minimum payments over several years. Many people save tens of thousands of dollars within four to five months, which is the average time it takes to receive the debt discharge in Chapter 7, even when accounting for property sold by the trustee. Chapter 13 offers similar savings.

Creditor Payments in Chapters 7, 13, and 11

In Chapter 7, your creditors are paid through the sale of your property. In Chapters 13 and 11, creditors receive payments through an approved repayment plan. In a nutshell, you're allowed to keep a certain amount of earnings and property, and creditors are entitled to the remainder. The specific way creditors receive payment differs depending on the chapter filed:

• Chapter 7 payments. The Chapter 7 trustee sells property you're not authorized to keep—typically luxury items, such as boats, expensive cars, and RVs—for the benefit of creditors. This is why debtors only qualify for Chapter 7 if, after paying monthly living expenses, they don't have funds remaining to pay creditors.
• Chapter 13 payments. The Chapter 13 trustee doesn't sell property. Instead, Chapter 13 filers keep everything they own and repay creditors a portion of their earnings over three to five years.
• Chapter 11 payments. In Chapter 11 bankruptcy, creditors agree on an overall repayment plan that replaces existing contracts and agreements. The repayment plan can involve selling property, reducing debt balances or interest, modifying payment schedules, and other approaches.

How Much Does Bankruptcy Cost? 2025 Fees Breakdown

You can expect to pay $2,000 or more for a Chapter 7 case and $3,800 or more for a Chapter 13 bankruptcy. Bankruptcy is relatively affordable, with costs including attorney fees, court filing fees, and required education courses. In most cases, you'll pay a flat fee that covers all the basic services needed, and you won't incur any unexpected charges. Here's the breakdown of average legal fees in bankruptcy:

Chapter 7. $2,000 to $4,000 in total costs

• $1,800 in attorney fees on average, ranging from $1,500 to $3,500
• $338 court filing fee (as of September 2025), and
• $80 or less for required education courses.

Chapter 13. $3,800 to $6,800 in total costs

• $4,200 in attorney fees on average, ranging from $3,350 to $6,400
• $313 court filing fee (as of September 2025), and
• $80 or less for required education courses.

Chapter 11. Tens of thousands of dollars in total costs.

• Contact a Chapter 11 specialist for a cost assessment.

Tip. Plan to pay your Chapter 7 attorney fees up front. Unpaid legal fees are discharged in Chapter 7, so your attorney won't file until you're fully paid. However, it's common to pay a significant portion of Chapter 13 attorney fees through the Chapter 13 plan.

Types of Bankruptcy: Chapters 7, 13, and 11 Explained

The three primary types of bankruptcy include Chapter 7 liquidation bankruptcy, which allows for quick debt elimination, and Chapter 13 reorganization, which involves a repayment plan and lets you keep everything you own. The third type, Chapter 11 reorganization, is primarily for struggling businesses that are fighting to avoid closure. Chapter 7 accounts for 60% of all bankruptcy filings, Chapter 13 represents 38%, and Chapter 11 comprises less than 2%. (U.S. Court 2024 Bankruptcy Filing Statistics.)

Here are the basics of each of the three most common bankruptcy chapters:

1. Chapter 7 bankruptcy. Chapter 7 is known as the "liquidation" bankruptcy because property can be sold for creditors. Income must be below the qualification limits, and qualifying debts are typically eliminated within four to five months.
2. Chapter 13 bankruptcy. Chapter 13 cases involve a three- to five-year repayment plan. Earnings must be high enough to pay all required creditor payments. Qualifying debt balances are discharged after plan completion.
3. Chapter 11 bankruptcy. Chapter 11 is a reorganization bankruptcy used by income-generating companies struggling to remain in business. It's also filed by individuals whose debt amounts exceed Chapter 13 limits.

Chapter 7 Bankruptcy: The Fastest Debt Elimination

Chapter 7 is the fastest bankruptcy type, eliminating many debts in about four to five months for those who qualify under the means test. It's not surprising that most people prefer to file for Chapter 7. It doesn't require creditor payments, eliminates many debts, like credit card balances, medical bills, and personal loans, and is completed in about four to five months.

However, to qualify, you must pass the "means test," an evaluation determining whether you can afford to repay some of your debt in Chapter 13. If the test shows that you can, you won't qualify. Additionally, because Chapter 7 doesn't provide a way to repay creditors, it doesn't offer the type of solutions available in Chapter 13.

Tip. Individuals and businesses can file this type of bankruptcy. However, businesses rarely do. If you own a failing or closed company, you'll want to learn more about small businesses in Chapter 7.

Can I Keep My House in Chapter 7 Bankruptcy?

Yes, but you must meet particular requirements to keep your house in Chapter 7, such as:

• Exempt status. You must protect your home equity with bankruptcy exemptions. If you can't, you'll lose the home to the trustee.
• Payment status. You must be current on mortgage payments. If not, you'll lose the house to the lender.
• Affordability. You must be able to afford ongoing payments to prevent a future foreclosure.

Learn more about the requirements to prevent losing your home in Chapter 7 bankruptcy.

Can I Keep My Car in Chapter 7 Bankruptcy?

Again, yes. Keeping your car in Chapter 7 bankruptcy depends on several factors:

• Exempt status. You must be able to protect your vehicle equity with bankruptcy exemptions. If you can't, you'll lose it to the trustee.
• Payment status. You must be current on your car loan. If not, you'll lose the car to the lender.
• Affordability. You must be able to afford ongoing car payments to prevent a future repossession.

Learn more about other requirements for keeping a car in Chapter 7 bankruptcy.

Chapter 13 Bankruptcy: Keep Your Property with Payment Plans

Chapter 13 bankruptcy allows individuals with regular income to repay a portion of their debts through a three-to five-year plan while keeping their assets. It solves problems that can't be addressed in other chapters. The trustee doesn't sell property. Instead, you pay creditors through a three- to five-year repayment plan.

Chapter 13 is best suited for those who earn too much to qualify for Chapter 7 or those who want to keep property they'd lose in Chapter 7 bankruptcy. For instance, you can use the repayment plan to do the following:

• catch up on mortgage payments and keep a house
• bring a car loan current and keep a car, or
• pay creditors to keep the property that a Chapter 7 trustee would sell.

Only individuals and sole proprietors qualify for Chapter 13 bankruptcy. Businesses and companies can't use it. Instead, they can use a similar Chapter 11, Subchapter V process.

Can I Keep My House in Chapter 13 Bankruptcy?

Yes, Chapter 13 bankruptcy is often an excellent way to keep your home, especially if you're behind on mortgage payments, because it allows you to:

• Stop foreclosure. Filing for Chapter 13 immediately triggers an "automatic stay," which halts foreclosure proceedings.
• Catch up on payments. You can spread out missed mortgage payments over three to five years.
• Protect equity. If you can't fully protect your home equity with an exemption, you can pay creditors an amount equaling the nonexempt portion through the plan.
• Reduce mortgages. In some cases, you can eliminate wholly unsecured junior mortgages and HELOCs in Chapter 13.

As long as you can make your ongoing mortgage payments and the payments required by your Chapter 13 plan, you can typically keep your home in Chapter 13 bankruptcy.

Can I Keep My Car in Chapter 13 Bankruptcy?

Yes, Chapter 13 is excellent for keeping vehicles because you can:

• Stop repossession. Filing for Chapter 13 immediately triggers an "automatic stay," which stops the lender from repossessing your car.
• Catch up on payments. You can spread out missed vehicle payments over three to five years.
• Protect equity. If you can't fully protect your car equity with an exemption, you can pay creditors an amount equaling the nonexempt portion through the plan.
• Reduce loan balance. In some cases, you can reduce the car loan balance to the amount actually owed.

Learn additional details about what you must do to keep your car in Chapter 13 bankruptcy.

Chapter 11 Bankruptcy: Business Reorganization Process

Chapter 11 bankruptcy is primarily for businesses to reorganize their debts and continue operating, although individuals with very high debt may also file. It's usually filed by large and small businesses that need payment allowances from creditors to keep an otherwise money-generating business open.

How to Choose the Right Bankruptcy

Your first step? Verify whether your debts qualify for a bankruptcy debt discharge. Next, determine if you can protect your property in your state using available bankruptcy exemptions. Then, assess which chapter will best meet your needs and whether you qualify.

Tip. If examples help you understand principles, you'll want to read our article on filing for bankruptcy. In it we use examples to illustrate how the same set of facts result in different outcomes in Chapters 7 and 13 to help you identify the best chapter for you.

Debts You Can't Eliminate in Bankruptcy

You will have to pay for debts that don't go away in bankruptcy, called "nondischargeable debt." If you file for Chapter 7 bankruptcy, these debts will remain with you after your Chapter 7 bankruptcy ends. In Chapter 13, you'll pay most nondischargeable debts in full through your Chapter 13 plan (but not student loans). These are the most common nondischargeable debts (11 U.S.C. § 523(a)):

• domestic support obligations, such as spousal and child support
• income taxes incurred within the last three years (and sometimes older taxes, too)
• injury or wrongful death awards stemming from operating a vehicle while intoxicated, and
• student loan debt (unless you can show that it would be unfair to require repayment).

Before deciding to file for bankruptcy, make sure you can erase enough debt to make filing for bankruptcy worthwhile.

How Bankruptcy Exemptions Protect Your Property

Much of bankruptcy involves determining whether bankruptcy exemptions protect your property. You can keep exempt property without worry of the trustee selling it or needing to pay to keep it. Here's how this works.

• Chapter 7. Exempt property is safe. Nonexempt property can be sold by the trustee, with proceeds distributed to creditors.
• Chapter 13. You keep all property. However, the nonexempt value determines the minimum you must pay unsecured creditors through your plan.

Exemptions vary between states, so it's essential to review the exemptions that apply to you. Some states allow filers to use the federal bankruptcy exemptions instead. Because you must choose which set to use, you'd select the exemption set that you find best overall. Examples of common bankruptcy exemptions include:

• Homestead. Protects equity in your primary home.
• Motor vehicle. Protects vehicle equity.
• Wildcard. Flexible exemption for any property.
• Personal property. Covers household items, clothing, and jewelry.
• Tools of the trade. Protects work-related equipment.
• Retirement accounts. Most qualified accounts are protected.
• Public benefits. Social Security, unemployment, and disability are usually fully exempt.

Important. If the property is financed, you'll need to meet additional requirements to prevent the lender from recovering it. Always consult a bankruptcy attorney to maximize your exemptions.

Which Bankruptcy Chapter Is Best for Your Situation?

Ask yourself these questions.

• Do you qualify for Chapter 7? If you can, the next step is determining if you qualify for Chapter 7 bankruptcy by passing the bankruptcy means test. If you pass the test, you might want to consider filing for Chapter 7 bankruptcy. However, it's always advisable to consult a bankruptcy attorney.
• Is Chapter 13 the better option? If you don't qualify for Chapter 7 bankruptcy or have other problems, such as wanting to keep a home out of foreclosure or prevent your car from being repossessed, you might want to consider filing for Chapter 13 bankruptcy.
• Is Chapter 11 the only real option? This might apply if you have a business you'd like to remain open. Fortunately, a cheaper, more streamlined version of Chapter 11 is available for small businesses. The benefit of Chapter 11, Subchapter V is that it's modeled after Chapter 13.

Learn when Chapter 13 is a better option than Chapter 7.

Bankruptcy Filing Process: Forms, Trustee, and Court

Bankruptcy starts when you file completed bankruptcy forms with the bankruptcy clerk. In your bankruptcy filing, you'll explain everything about your financial situation, which in turn will reveal why you're bankrupt.

The Bankruptcy Paperwork

Some of the things you'll tell the bankruptcy court will include:

• your earnings, debts, and the property you own
• your banking, retirement, and investment balances
• whether you've sold or given away property
• if you have a storage space or safe deposit box
• whether you had property seized, and
• if anyone has filed a lawsuit against you.

You'll also complete two bankruptcy educational courses—a credit counseling course within 180 days before filing and a debt counseling course after filing. Both are required to receive the debt discharge order that eliminates qualifying debt.

The Bankruptcy Trustee

Reviewing your bankruptcy paperwork is the responsibility of the bankruptcy trustee appointed by the bankruptcy court to oversee your case. The trustee also ensures that each creditor receives what they're entitled to under bankruptcy law. For the efforts, the bankruptcy trustee gets a percentage of the amount paid to creditors.

Tip. How the bankruptcy trustee will pay creditors depends on which one of the three types of bankruptcy you file. In Chapter 7, property is sold for creditors. In Chapters 13 and 11, you keep your property and pay agreed amounts according to a court-approved plan.

The 341 Meeting of Creditors

About a month after you file for bankruptcy, you'll attend a required court hearing with the trustee called the "341 meeting of creditors." (11 U.S.C. § 341(a).) Despite the name, creditors rarely attend.

Your primary interaction will be with the bankruptcy trustee assigned to your case. The trustee will ask you questions under oath about your bankruptcy forms and financial situation to verify the information and ensure the case is proceeding correctly. This meeting is typically straightforward and relatively short.

Learn about the meeting of creditors in Chapter 7 bankruptcy.

What to Do If You're Considering Bankruptcy

Here are your next steps if you're considering bankruptcy.

1. Consider Your Options
   • Explore bankruptcy alternatives. Look into debt consolidation and negotiation.
   • Get qualified. Find out if you pass the Chapter 7 means test or whether you can afford the required Chapter 13 plan payment.
   • Talk to a professional. Get a free consultation with a bankruptcy lawyer.
2. Assemble Financial Information (you'll need more later)
   • Gather statements and collection notices. Consider pulling a credit report. Create a list of all debts that you don't have documentation for.
   • Find income documentation. You'll need recent pay stubs, tax returns, and profit and loss statements.
   • Identify property. Copy recent banking, retirement, and investments statements. Make a list of all major property you own, including values. Check whether state bankruptcy exemptions protect your assets.
3. Consider Ways to Reduce Bankruptcy Costs
   • Stop paying certain debts. Once you know you qualify for bankruptcy, you can redirect the funds you'd pay toward debts that will be discharged to your attorneys' fees.
   • Seek financial help from friends and family. The people closest to you are often willing to help pay for a bankruptcy because they recognize it's a solid, long-term solution—and while you can't use your credit card to pay your attorney, your friend or family member can use theirs.
   • Ask about a payment plan. Most bankruptcy lawyers will accept payments, but don't expect them to file the case before you've fully paid the amount they require. In Chapter 7, it will be the entire balance (see the above tip).
   • Look for pro bono services. You'll want to check with legal aid providers. Also, some law schools offer bankruptcy services in their on-campus legal clinics.
   • File yourself. If you have a simple case, it's possible to file for bankruptcy without an attorney. However, even though it's possible, hiring a bankruptcy lawyer is usually well worth the cost.
   • Apply for a fee waiver. Your income must be low to qualify. However, if you don't qualify, the bankruptcy court will likely allow you to pay the fee in installments.
4. Prepare for Your Bankruptcy Filing
   • Secure housing. You'll have difficulty renting a place to live for a year or two.
   • Open bank accounts. If you're overdrawn when you file, the bank will close your accounts, and it won't be easy to open new ones. Be sure you have a problem-free account open before filing and know what to do with bank accounts, automatic payments, and utility deposits.
   • Spend funds. Some creditors can and will drain your account when they learn of your filing, so it's a bad idea to maintain much of a balance. Also, it's challenging to protect and keep cash in Chapter 7.
5. Prepare to Rebuild Credit
   • Get a credit card. You'll likely receive credit offers soon after your bankruptcy. While an unsecured card with a credit limit of at least $1,200 is best, a secured credit card can work, too. This type of card requires a deposit, acting as your credit limit, and helps demonstrate responsible credit use.
   • Pay on time. Timely payments demonstrate reliability to creditors.
   • Pay down balances. The more available credit you have, the higher your score.
   • Review your credit report. Check it for errors and to track your credit rebuilding progress. You can get free reports at Annualcreditreport.com.

Frequently Asked Questions About Bankruptcy

• Will filing for bankruptcy ruin my credit forever?
• Will everyone know I filed for bankruptcy?
• Can my employer fire me for filing for bankruptcy?
• How long does the bankruptcy process take?
• Can I keep my house and car in bankruptcy?
• Does bankruptcy stop wage garnishment immediately?
• How long does bankruptcy stay on your credit report?
• What debts can"t be discharged in bankruptcy?
• Do I qualify for Chapter 7 bankruptcy?
• Can I file bankruptcy without an attorney?
• Will I lose everything if I file for bankruptcy?
• How much income is too much for Chapter 7?
• Can bankruptcy stop foreclosure on my home?
• What happens to my business if I file personal bankruptcy?

Will filing for bankruptcy ruin my credit forever?

No. While bankruptcy stays on your credit report for 7 to 10 years, many people see their credit scores improve within a year or two after filing. You can often get secured credit cards and car loans relatively quickly after bankruptcy.

Will everyone know I filed for bankruptcy?

Bankruptcy is a public record, but it's not published in newspapers unless you're a public figure or large business. Most people in your life won't know unless you tell them.

Can my employer fire me for filing for bankruptcy?

No. Federal law prohibits employers from discriminating against employees who file for bankruptcy. However, some jobs that require security clearances or involve handling money may be affected.

How long does the bankruptcy process take?

Most Chapter 7 cases take about four to six months to complete. Chapter 13 cases typically are completed in five years, although some filers' plans last three years. Chapter 11 cases usually take 12 to 18 months to confirm, and the plan becomes the new agreement executed between the debtor and creditors outside of bankruptcy.

Can I keep my house and car in bankruptcy?

Often yes, but the requirements vary depending on the bankruptcy chapter filed, whether you can protect your home equity with a bankruptcy exemption, whether you're current on payments, and whether you can afford to continue making them.

Important. Debt stress doesn't need to control your life. Exploring your options and choosing to use bankruptcy as a means to obtain a fresh start is a responsible way to achieve financial recovery.

Does bankruptcy stop wage garnishment immediately?

Yes. The automatic stay immediately stops almost all collection actions, including wage garnishment, collection lawsuits, and foreclosure. (11 U.S.C. § 362(a).) However, if you have filed and dismissed multiple bankruptcy cases within the previous year, the automatic stay might be limited or not go into effect at all.

How long does bankruptcy stay on your credit report?

Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 stays for seven years. However, you can begin rebuilding credit within a year or two after filing.

What debts can't be discharged in bankruptcy?

Student loans, recent tax debts, child support, alimony, and debts from DUI-related injuries typically can't be discharged in bankruptcy. You'll remain responsible for these debts after Chapter 7, and will pay them entirely through the Chapter 13 plan.

Do I qualify for Chapter 7 bankruptcy?

You'll qualify if you pass the "means test" and if your current income and expenses declared on bankruptcy forms Schedules I and J demonstrate that you don't have enough disposable income to fund a Chapter 13 plan.

Can I file bankruptcy without an attorney?

People with simple Chapter 7 cases—those with minimal income and property—can usually file without an attorney if they're willing to do the necessary research to understand complex federal law and court procedures. However, most filers benefit significantly from professional legal representation.

Will I lose everything if I file for bankruptcy?

No. Bankruptcy exemptions allow all filers to keep things necessary to maintain a household and employment. For instance, most states allow you to protect some equity in a home, household items, work tools, and a retirement account.

How much income is too much for Chapter 7?

Income limits vary by state and family size. For 2025, median household income ranges from approximately $45,000 to $100,000 or more, depending on your state and family size. You can find current amounts on the U.S. Trustee Program website.

Can bankruptcy stop foreclosure on my home?

Yes. In Chapter 7, the automatic stay temporarily stops foreclosure, but it will likely resume if you're behind on payments. Chapter 13 is the better option because the three- to five-year repayment plan gives you time to catch up on payments. In both cases, you must be able to protect the property equity with bankruptcy exemptions. Otherwise, you'd lose the home to the trustee in a Chapter 7 bankruptcy. The other option would be to pay for the nonexempt equity in Chapter 13.

What happens to my business if I file personal bankruptcy?

It depends on your business structure and whether you file for Chapter 7 or 13. If you're a sole proprietorship, all personal and business assets and debts will be handled in the bankruptcy. If you have an ownership interest in a corporation or LLC, you'll need to protect its value with bankruptcy exemptions as you would with any other property.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.