Bankruptcy
When Nothing Else Works, Start Over
Bankruptcy wipes the slate clean through court-supervised debt relief. What the process looks like, what it costs, and what happens to your credit afterward.
What Is Bankruptcy?
Bankruptcy is a federal court process for people and businesses who cannot pay their debts. The moment you file, an "automatic stay" kicks in -- creditor lawsuits stop, wage garnishments halt, foreclosure proceedings freeze, and collection calls end.
Two main types. Chapter 7 (liquidation) wipes out most unsecured debts in 3-6 months. Chapter 13 (reorganization) puts you on a court-approved repayment plan for 3-5 years. This should come after you have seriously looked at settlement, consolidation, and counseling. It works, but the consequences stick around.
How Bankruptcy Works
Credit Counseling (Required)
Federal law makes you complete a credit counseling course from an approved agency within 180 days before filing. The point is to verify you have actually considered other options first.
File Your Petition
You and your bankruptcy attorney file a petition with the federal court listing every debt, asset, income source, and expense. The automatic stay kicks in the moment the petition is filed.
Meeting of Creditors (341 Hearing)
About 30-45 days after filing, you sit for a brief hearing where the court-appointed trustee and any creditors can ask about your finances. Most last 5-10 minutes. It is not a trial.
Discharge or Repayment Plan
Chapter 7: qualifying debts are eliminated 60-90 days after the hearing. Chapter 13: the court approves a 3-5 year repayment plan, and whatever qualifying debt remains at the end gets discharged.
Key Facts
Pros and Cons
Advantages
- Immediate protection from creditors (automatic stay)
- Chapter 7 eliminates most unsecured debt in 3-6 months
- Chapter 13 stops foreclosure and allows you to catch up on mortgage
- Stops wage garnishment, lawsuits, and collection harassment
- Provides a true "fresh start" with legal finality
- Many exemptions protect essential assets (home, car, retirement accounts)
Drawbacks
- Stays on credit report 7 years (Ch. 13) to 10 years (Ch. 7)
- Significant immediate credit score drop (150-200+ points)
- Chapter 7 may require liquidation of non-exempt assets
- Does not discharge student loans, child support, or most tax debts
- Filing fees ($338 Ch. 7, $313 Ch. 13) plus attorney costs ($1,000-3,500)
- Public record — anyone can look up your filing
Is Bankruptcy Right for You?
Good Fit If...
- Your debt is overwhelming and you see no realistic way to repay it
- You are facing active lawsuits, wage garnishment, or foreclosure
- Other options (settlement, consolidation, counseling) have failed or are insufficient
- Your income is below your state's median (for Chapter 7 eligibility)
- You need immediate legal protection from creditors
May Not Be Ideal If...
- Your primary debts are student loans, child support, or recent taxes (non-dischargeable)
- You have significant assets you would lose in Chapter 7 liquidation
- You can afford your debts with restructuring (consolidation or DMP)
- You plan to apply for a mortgage in the next 2-4 years
- Your financial problems are temporary (job loss with new job lined up)
Frequently Asked Questions
Chapter 7 sells non-exempt assets and discharges most unsecured debts in 3-6 months. Chapter 13 lets you keep everything but puts you on a court-supervised repayment plan for 3-5 years. Chapter 7 requires passing a means test (your income must be below your state median). Chapter 13 is open to anyone with regular income.
Considering Bankruptcy?
Before filing, explore all your options. Our strategy comparison tool helps you understand which approach is best for your situation.