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Bankruptcy guide
Chapters 7, 11 and 13 explained.
Wiping the slate clean by filing for bankruptcy might be the best option if you struggle with debt you don’t think you can ever pay off. But there are a few different types of bankruptcy to consider — and not all are available to everyone.
How does bankruptcy work?
Bankruptcy is a legal process that works by wiping out some or all of your debt, depending on the type of bankruptcy you file for. The court also might assign you a new repayment plan with different terms to pay off your debt.
After you file for bankruptcy, the court might seize and sell off some of your assets to cover the debts you owe. Or it’ll help you come up with a repayment plan to cover some of your debts. Typically, the court hosts a meeting with your creditors at least once to iron out the details of your bankruptcy.
When is bankruptcy right for me?
Bankruptcy is meant to be a last resort and comes with serious consequences. While it gives you a fresh start, you could lose many of your personal assets. And it seriously hurts your credit. Bankruptcies can stay on your credit report from 7 to 10 years, making it difficult for you to qualify for any type of financing in the future.
But bankruptcy might be right for you in some situations — especially if you’re at risk of your creditor suing you. If your creditor wins, they could take even more extreme steps to get their funds back, like garnishing your wages or putting a lien on your home. Bankruptcy only affects assets that you already have.
Types of bankruptcy
There are three main types of bankruptcy that individuals can file for: Chapter 7, Chapter 11 and Chapter 13. Which one is right for you depends on your specific circumstances.
Chapter 7
Also known as liquidation bankruptcy, Chapter 7 bankruptcy wipes out all of your debt by selling off your possessions and using the proceeds to pay off your creditors. This option is only available if you pass a “means test,” which demonstrates you don’t make enough money to pay off the debt and that it interferes with your personal relationships.
Generally, Chapter 7 bankruptcy applies to unsecured debt. This can include credit card debt, medical bills, past-due rent, unpaid taxes and more.
Also known as the reorganization chapter, Chapter 11 bankruptcy works by allowing businesses and individuals to come up with a modified payment plan rather than selling off their belongings. With filing fees alone clocking in at $1,167, it’s the most expensive type of bankruptcy available to individuals. You might want to go for this option only if you have more debt than Chapter 13 will allow.
Generally, Chapter 11 bankruptcy covers unpaid taxes, mortgages, credit cards and other types of personal debt.
Also called the wage-earner’s plan, Chapter 13 allows you to pay off your debts in installments over three to five years. This means you won’t have to liquidate your assets — or at least not all of them. But you can’t qualify if you have unsecured debts over $394,724 and secured debts over $1,184,199. If your debt load is too high, Chapter 11 might be a better choice.
Generally, Chapter 13 covers secured and unsecured debts such as personal loans, credit cards and even some legal judgments.
Bankruptcy has a highly negative impact on your credit. How it affects your credit score depends on your current rating. Going bankrupt when you have excellent credit can knock your score down by over 100 points. But if you already have poor credit, it might not make a significant change.
Bankruptcy and credit reports
In addition to your credit score, bankruptcy stays on your credit report for several years. So even if you do manage to rebuild your credit quickly, this could still disqualify you from many types of financing — even some short-term loans.
Chapters 7 and 11 stay on your credit report for up to 10 years.
Chapter 13 stays on your credit report for up to seven years.
Chapter 7 vs. Chapter 11 vs. Chapter 13
Not sure what type of bankruptcy to consider — if any? Let’s take a look at what happens with different types of debt.
Type of debt
Chapter 7
Chapter 11
Chapter 13
Mortgage
Your house might be sold.
You still pay off your mortgage according to a modified repayment plan.
You still pay off your mortgage according to a modified repayment plan.
Car loan
Your car might be sold.
You still pay off your car loan according to a modified repayment plan.
You still pay off your car loan according to a modified repayment plan.
Unsecured personal loan
Might be discharged.
You still pay off your personal loan according to a modified repayment plan.
You still pay off your personal loan according to a modified repayment plan.
Credit cards
Likely discharged.
You still pay off your credit cards according to a modified repayment plan.
You still pay off your credit cards according to a modified repayment plan.
Student loans
Likely won’t be affected.
Likely won’t be affected.
Likely won’t be affected.
Bankruptcy property exemptions
Which assets you lose when you file for bankruptcy depends on where you live. That’s because most states exemptspecific types of property from being seized.
For example, Texas allows residents to keep one car per licensed adult in a household when you file for bankruptcy. California residents can receive part of the proceeds from the sale of their home — or in some cases even keep it.
Alternatives to bankruptcy
Bankruptcy isn’t the only way to get out of debt. Before you file, consider these alternatives.
Settle or negotiate with your creditors
You might be able to reach out to your creditors yourself, explain the situation and negotiate a modified repayment plan. If successful, it’ll likely affect your credit less than bankruptcy, will allow you to keep your assets and won’t cost you any filing fees.
Get help from a credit counseling agency
The Justice Department requires anyone filing for Chapter 7 to sign up for credit counseling, but anyone considering bankruptcy can benefit. These nonprofit agencies can help you go over your finances and figure out your best path out of debt. You can find a list of government-approved credit counseling agencies on the Justice Department’s website.
Sell your assets
Got a luxury car? An expensive home? Selling your valuables to pay off debts might help you avoid filing for bankruptcy — and avoid losing even more of your possessions.
Ask family and friends for help
If you haven’t already, reach out to your friends and family for help. You don’t necessarily have to rely on the generosity of a few people: You can start a crowdfunding campaign to raise small donations from a large group.
If your debt is less than half your income and you have good to excellent credit, you might be able to get a handle on your repayments by taking out a debt consolidation loan with more manageable rates and terms.
If you’re not quite sure you need to file for bankruptcy, debt relief might be worth considering. This option involves hiring a company to negotiate with your creditors to settle your debts in exchange for one large payment or a modified repayment plan you can afford.
However, debt relief can be expensive. And if you fail to follow it through, you could end up having to file for bankruptcy anyway.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And not all companies are transparent about these costs or drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.
Consider alternatives before signing up with a debt relief company:
Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.
Bottom line
What happens during bankruptcy depends on the type you file for. Chapter 7 wipes the slate clean, while Chapters 11 and 13 give you modified repayments. But all options will seriously damage your credit.
There’s no minimum debt amount for Chapter 7, though you’ll have to pass a means test to demonstrate you’re unable to pay it off on your current income.
It depends on your financial situation. Chapter 7 might be considered worse because you can lose your assets, whereas Chapter 13 allows you to keep most or all of your belongings. However, Chapter 7 discharges debts, whereas you’re still on the hook for repayments with Chapter 13.
Yes, there are a few ways you can keep your car after filing for Chapter 7 bankruptcy — even if you don’t own it outright. However, you typically need to be current on your car loan repayments to qualify. You can learn more with our guide to keeping your car during bankruptcy.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
If you’re overwhelmed with debt but don’t want to liquidate assets, Chapter 13 bankruptcy can help you restructure finances with repayments in 3 to 5 years.
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