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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.

You can file for bankruptcy by downloading forms on the US Courts website and bringing them to a Bankruptcy Court, along with supporting documents that vary by bankruptcy type. You might also be required to undergo credit counseling before you can file.

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.

Chapter 11

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.

Chapter 13

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.

How Chapter 13 bankruptcy works

How does bankruptcy affect my credit?

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 debtChapter 7Chapter 11Chapter 13
MortgageYour 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 loanYour 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 loanMight 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 cardsLikely 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 loansLikely 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 exempt specific 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.

What debts are covered?

At the end of your bankruptcy period, you’ll be released from liability for many of your debts. However, some debts you’ll need to keep paying.

Unsecured loan debt

DebtWill the debt be cleared when my bankruptcy is finalized?Conditions
Credit cardYesNone
Store cardYesNone
Unsecured personal loanYesNone
Unsecured business loanYesNone
Trade creditorYesNone
Payday loanYesNone
Pawn shop loanYesYou won’t get your pawned items back
Overdrawn accountYesNone

Secured loan debt

DebtWill the debt be cleared when my bankruptcy is finalized?Conditions
MortgageYes
  • With a Chapter 7 bankruptcy, your home may be sold off to pay for your debts. If you’re able to keep your home, personal liability for the mortgage is discharged, but the bank can still foreclose on the home if you don’t continue to pay.
  • With a Chapter 13 bankruptcy, you may be able to discharge a second or third mortgage, but you’ll have to continue to pay your original home mortgage both during and after the bankruptcy.
Car loanYes
  • With a Chapter 7 bankruptcy, your car may be sold off to pay for your debts. If you’re able to keep your car, personal liability for the loan is discharged, but your lender can still repossess it if you don’t continue to pay. You can learn more with our guide to keeping your car during bankruptcy.
  • With a Chapter 13 bankruptcy, you’ll have to continue to pay your car loan both during and after the bankruptcy.
Secured business loanYes
  • With a Chapter 7 bankruptcy, personal liability for the loan is discharged, but your lender can repossess the asset you used to apply for the loan if you don’t continue to make payments.
  • With a Chapter 13 bankruptcy, you’ll have to continue to pay your secured loan both during and after the bankruptcy.

Household debt

DebtWill the debt be cleared when my bankruptcy is finalized?Conditions
UtilitiesYesYou may have to pay a deposit to get utilities in the future
Outstanding rent where you currently liveYesCheck local laws to see your tenancy rights your landlord may be able to evict you if you had past due rent when you filed.
Outstanding rent where you used to liveYesNone
Debts from property you damaged as a tenantYesNone

Taxes, fines, fees and court debts

DebtWill the debt be cleared when my bankruptcy is finalized?Conditions
Legal feesYesNone
Accounting feesYesNone
Government finesYesNo
  • Punishment fines, such as speeding or parking tickets, won’t be wiped out by Chapter 7 bankruptcy.
  • Fines not related to a criminal conviction can be cleared in Chapter 13 bankruptcy.
Court-ordered restitutionNoNone
TaxesYesNoYou can discharge federal income taxes that you non-fraudulently filed on time more than three years ago. Other conditions may apply.
Child supportNoNone

Other debts

DebtWill the debt be cleared when my bankruptcy is finalized?Conditions
Unliquidated debtsYesNoThis will depend on the type of unliquidated debt, and will follow similar rules to liquidated debt.

For example, if you’re being tried in a criminal case and may have to pay restitution, that cannot be cleared when you file for bankruptcy.

If a previous landlord is suing you in civil court for damages to an apartment but the estimate isn’t completed, that can be discharged in bankruptcy.

Medical billsYesNone
Student loansYesNoStudent loans are rarely discharged in a bankruptcy, but you may be able to discharge the debt if you can prove that you’re financially unable to make any sort of payment, you won’t be able to make any sort of payment in the future and you’ve tried in good faith to pay the debt.
Debts incurred after you started bankruptcy filingsNoNone
Provable debts incurred by fraudNoNone

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. 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.

Or if you’re uncomfortable taking a gift, you can refinance your debt with a loan from friends or family.

Consolidate your debts

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.

Got a lot of credit card debt? Consider moving it to a new balance transfer credit card, which typically comes with a 0% promotional rate for the first six to 18 months.

Debt relief

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.

Compare debt relief companies

Compare your debt relief options

Explore your options by costs and requirements. Select the Learn More button for information about a particular service.

1 - 3 of 3
Name Product Costs Requirements
Freedom Debt Relief
Monthly payment based on enrolled debt, no upfront fees
Must have at least $7,500 in unsecured debt, have a hardship is preventing the ability to pay creditors, and live in a serviced state.
Freedom Debt Relief works to help people with unmanageable, unsecured debt get back on their feet.
Accredited Debt Relief
Charges and fees vary by the company you're ultimately connected with
Must be at least 18 years old and a legal US resident; additional terms may apply based on services and products used.
This A+ BBB-rated service offers free consultations to lower your monthly payments help you get out of debt faster.
National Debt Relief
15–25% of total enrolled debt
Must have a legitimate financial hardship which is preventing the ability to pay creditors and a minimum of $7,500 in debt.
Get back on your feet with a top-rated company that works with multiple types of debt.
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Compare up to 4 providers

Before you sign up with a debt relief company

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.

Not sure it’s right for you? Consider your other debt relief options first.

Frequently asked questions

How can student loans be discharged in bankruptcy?

It can be difficult since you have to prove to the judge that making repayments would cause you undue hardship. Instead, you might want to sign up for a more manageable student loan repayment plan or pause your loans until you get back on your feet — most student loan providers offer deferment or forbearance for financial hardship.

How much do I have to be in debt to file for Chapter 7?

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.

Is Chapter 7 or 13 worse?

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.

Is it possible to keep my car when I file for Chapter 7 bankruptcy?

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.

More guides on Finder

  • Chapter 13 bankruptcy

    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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