If you’re feeling overwhelmed by debt and struggling to make ends meet, the idea of bankruptcy might feel like both a last resort and a lifeline. And in some cases, it can offer the financial reset people desperately need. But it’s also a major financial step—one with long-term consequences—so it’s important to fully understand what you’re getting into.
Bankruptcy is a legal process designed to help individuals or businesses who can’t pay their debts. When you file for bankruptcy, you’re asking the courts to discharge or reorganize your debts under federal protection. Bankruptcy is governed by bankruptcy law and the bankruptcy code, which set out the rules and procedures for the process.
Depending on the type of bankruptcy you file, some of your debts may be wiped out entirely, while others may be restructured into a manageable repayment plan. Personal bankruptcy cases are handled in bankruptcy court under federal law, where the court oversees the filing, reviews petitions, and manages the legal proceedings.
While bankruptcy is meant to give you a fresh start, it does leave a lasting mark on your credit and can impact your ability to borrow money, rent housing, or even get certain jobs. Understanding the bankruptcy code and the differences between types of personal bankruptcy is important before proceeding.
Most personal bankruptcies in the U.S. are Chapter 7 or Chapter 13 bankruptcy cases, and bankruptcy filings under these chapters are a common form of debt relief for those struggling with overwhelming debt.
Also known as “straight bankruptcy,” Chapter 7 allows you to wipe out most unsecured debts, like credit cards, medical bills, and personal loans. In return, you may have to give up some assets—although many people who file Chapter 7 qualify for exemptions that allow them to keep things like their home, car, or essential belongings.
Some debts, such as certain taxes, child support, and federal student loans, are considered non dischargeable debts and cannot be eliminated through Chapter 7 bankruptcy.
Who it’s for: People with limited income and few assets who can’t realistically pay back their debts.
Pros:
Cons:
While most unsecured debts can be wiped out, some assets, such as personal injury settlements, may be considered exempt property depending on state law.
To receive a bankruptcy discharge, you must complete all required steps, including the debtor education course, and the discharge releases you from personal liability for most debts.
Chapter 13 is a court-approved repayment plan. You work with the court to develop a plan (typically 3–5 years) to repay all or part of your debts. The plan involves making a monthly payment based on your regular income, and the court may adjust the interest rate on certain debts. This type of bankruptcy allows you to keep your assets, including your home and car, as long as you stay current on the repayment schedule.
Who it’s for: People with regular income who can make consistent monthly payments and can afford to pay back some of their debts over time.
Pros:
Cons:
In some cases, you may be able to pay off certain secured debts, like a car loan, with a lump sum payment as part of the plan.
Bankruptcy can be powerful, but it’s not a magic wand. Here’s a quick rundown of what it can and can’t do:
Bankruptcy can:
Bankruptcy can’t:
It’s true—filing for bankruptcy will hurt your credit. A Chapter 7 bankruptcy stays on your credit report for 10 years, and Chapter 13 for 7 years. Your credit score may drop significantly, especially at first.
But here’s the thing: if your credit has already taken a hit due to missed payments, maxed-out cards, or collections, bankruptcy might not cause as much additional damage as you’d expect. For some people, it’s the first step toward rebuilding.
And yes, you can rebuild your credit after bankruptcy. It takes time and discipline, but many people qualify for a secured credit card or even a car loan within a couple years of filing.
Filing for bankruptcy isn’t just filling out a form—it’s a structured legal process. Careful preparation is essential, and you will need to gather financial documents such as pay stubs and bank account statements.
Here’s what typically happens:
Note: Free legal services may be available if you cannot afford a bankruptcy lawyer.
This is the million-dollar question. Bankruptcy might make sense if:
Understanding your overall financial health and the factors affecting your finances is crucial for making the right choice. If your situation is more temporary, or if your debt load is manageable with help, bankruptcy might not be necessary. Having regular income may also make you eligible for certain types of bankruptcy or alternative debt relief options.
Before jumping into bankruptcy, it’s wise to explore alternatives. Debt relief options, such as consumer credit counseling, may help you avoid bankruptcy. Some other paths to consider:
Bankruptcy is complicated—and deeply personal. You don’t have to figure it out alone.
Our certified financial counselors help thousands of people each year explore their options. In a free, confidential session, we’ll review your full financial picture and help you decide whether bankruptcy is the right step—or if there’s another solution that better fits your goals.
Understanding how bankruptcy works is key to making an informed decision. And if you do choose to file, a qualified bankruptcy attorney can guide you through the legal process and ensure everything is handled correctly.
This article is shared by our partners at GreenPath Financial Wellness, a trusted national non-profit.