Bankruptcy Information

This guide covers the basics of bankruptcy, when it might help, and what it will not fix.

Bankruptcy Decision Guide

Bankruptcy can provide legal relief from overwhelming debt, but it is not a simple clean slate. It has real financial costs and long-term consequences. This guide will help you understand when bankruptcy might be appropriate, and the two most common types of consumer bankruptcy filings.

Chapter 7 Liquidation Bankruptcy

• This is for individuals with limited income who cannot realistically repay their debt.

• You must pass a means test to prove you earn low income to qualify.

• A court-appointed trustee sells any non-exempt assets to repay creditors.

• Most unsecured debts like credit cards and medical bills are discharged within six months.

• The bankruptcy will stay on your credit report up to 10 years.

Chapter 13 Wage Earner's Plan

• This is for individuals with regular income who want to keep assets while restructuring debt.

• This option lets you keep property like your home or car.

• You propose a 3–5 year repayment plan to be approved by the court.

• After completing payments, remaining eligible debts are discharged.

• The bankruptcy will stay on your credit report for up to 7 years.

When Bankruptcy Makes Sense

• You have more debt than you can manage.

• AND you are facing foreclosure, creditor harassment, or wage garnishment.

• AND you are willing to accept the tradeoffs of either Chapter 7 (surrendering non-protected assets, 10-year credit mark) or Chapter 13 (committing to a strict 3-5 year repayment plan, 7-year credit mark).

When Bankruptcy Does NOT Make Sense

• Most of your debt is student loans, taxes, or child support.

• You could repay your debt in 5 years or less with a tight budget.

• You have not addressed the root cause of your debt.

Common Misconceptions About Bankruptcy

• "Bankruptcy eliminates all debts." This is not true. Bankruptcy does not eliminate student loans, tax debts, child support and alimony, court fines and criminal restitutions, debts incurred by fraud, or other debts taken out in bad faith (without the reasonable expectation that you would be able to repay).

• "Bankruptcy is free to file." This is not true. Bankruptcy costs on average around $1,000–$3,000 for Chapter 7 or around $2,000–$5,000+ for Chapter 13 for court costs and attorney fees.

• "Bankruptcy only impacts your ability to get loans." This is not true. Bankruptcy is public record and can affect your ability to rent or sometimes even get job opportunities.

Before Filing Bankruptcy

• Review your finances and figure out if you can get out of debt within five years without filing for bankruptcy.

• Contact creditors directly to negotiate payment plans or ask about hardship programs.

• Consider ways to increase your income or downsize expenses.

The Bankruptcy Process

• You will need to first complete required credit counseling at your own expense.

• Gather at least six months of comprehensive financial records.

• File petition with bankruptcy court.

• Once you file, an automatic stay stops most collection actions.

• Attend 341 Meeting of Creditors where you will be questioned under oath.

• A trustee will investigate your finances.

• You will need to complete a financial education course.

• If all steps are completed successfully, then you will receive notification of discharge through Chapter 7 within six months, or your structured payment plan to repay your debts within 3-5 years if you filed Chapter 13.

After Bankruptcy

• You will get relief from garnishment and collection calls. If you file Chapter 13, you can keep your home by staying current with your payment plan.

• Expect challenges such as difficulty renting apartments, higher insurance premiums, limited credit options with high fees, and years of rebuilding credit.

• Bankruptcy is not a silver bullet. Even if you succeed with discharging debts, you still need to develop better money management skills so you do not wind up in the same place again.

Bottom Line

In some situations bankruptcy does make sense and can provide much needed relief. But bankruptcy has serious and long-lasting consequences, so you should exhaust all other options first, and make sure you research and know what bankruptcy really is before filing.  If you do file, understand that it is not a reset button, it is a legal process with trade-offs that you need to understand and take into consideration. 

Reading List: Consider visiting your local library to explore books that help you rethink your relationship with money. You can borrow books for free and reading even one can have a big impact. Our recommendation if you are seriously considering bankruptcy is Personal Bankruptcy Laws for Dummies by James P. Caher and John M. Caher. It provides a practical overview of the bankruptcy process, outlining available options, the potential outcomes and consequences, and how to evaluate what approach best fits your situation.