What Is Bankruptcy? 2026 Rundown

When debt gets out of control, bankruptcy can help you get back on your feet, but filing is serious business. Because it can impact your credit score for seven to ten years, filing won’t make sense unless you can get rid of a good amount of debt. Find out the basics of what you should know about bankruptcy, the biggest of which are below.

Should I Consider Alternatives First?

The most common bankruptcy alternatives include negotiating directly with creditors for lower interest rates or a payment plan, enrolling in a nonprofit debt management plan, consolidating debt into a single, lower-interest loan, and requesting forbearance or deferral on specific loans. These options won’t damage your credit as severely as bankruptcy. You're required to take a prefiling credit counseling session that assesses these options before filing, providing you with the perfect opportunity to evaluate them.

Can I Erase My Bills in Bankruptcy?

Check whether you have the types of debt that bankruptcy will wipe out (discharge), such as credit card balances, medical bills, personal loans, back rent, gym memberships, payday loans, and utility bills. These debts disappear at the end of the bankruptcy case. You can also eliminate personal liability on mortgages, car loans, and other secured debts. To keep the property, you can continue making payments (called a reaffirmation agreement) or pay the creditor its current value in a lump sum; if you don't want to keep it, you surrender it to the lender. (11 U.S.C. § 727.)

Nondischargeable Debts in Chapter 7

However, some debts don’t go away. Child and spousal support obligations and recently incurred income tax bills are typical examples of “nondischargeable debt.” And the court won’t discharge student loans unless you file a separate lawsuit and meet the requirements to win, something most people can’t do. (11 U.S.C. § 523(a)(8).)

Even if you have nondischargeable debt, bankruptcy might still be an option. In Chapter 7, you’ll pay nondischargeable debt after your case ends, but it should be easier because you’ll owe fewer debts.

Nondischargeable Debts in Chapter 13

Many nondischargeable debts are also "priority" debts, meaning that if you file for Chapter 13, you must pay them off in full through the Chapter 13 repayment plan. As a result, many Chapter 13 filers walk away debt-free. The exception applies to long-term debts such as mortgages and student loans. You don't have to pay these in full. You'll still owe the balances after your case ends. (11 U.S.C. § 1328.)

Can I Keep My Property in Bankruptcy?

You won’t lose everything you own in bankruptcy, but you don’t choose what to keep. Your state lists the items bankruptcy filers can protect in its bankruptcy exemption laws, although some states let filers use the federal bankruptcy exemptions if they’d protect more property. You must pick one list or the other and can’t use exemptions from both lists. (11 U.S.C. § 522.)

Exemptions in Chapters 7 and 13

You’ll use the same exemptions in both Chapters 7 and 13. But what will happen to your nonexempt property—things an exemption doesn’t cover—is very different. In Chapter 7, you’d lose the nonexempt property, and the trustee appointed to manage your case would sell it and give the proceeds to your creditors. In Chapter 13, you don’t lose nonexempt property. Instead, you must pay creditors what it’s worth through the repayment plan. (11 U.S.C. § 522.)

Finding Bankruptcy Exemptions

Review your state’s bankruptcy exemptions to get a feel for the property you’d keep and whether you can choose between state and federal exemption laws. Bankruptcy exemptions are also available in Nolo’s state bankruptcy exemption article section.

Will Chapter 7 or Chapter 13 Bankruptcy Work for Me?

Not all debt problems are the same. Different chapters solve different issues, so we’ve outlined the key points below to help you understand how each bankruptcy type works.

• Chapter 7 works well if you live a frugal lifestyle but struggle to make ends meet. Chapter 7 is quick. You’ll wipe out credit card and utility balances, medical bills, and more in three to four months. You’ll also be able to keep property essential to work and live. Any luxury property gets sold for the benefit of creditors. Income limitations apply.
• Chapter 13 works for those with a steady monthly income and high debt. You’ll pay creditors an amount you can afford for three to five years. Unlike Chapter 7, filers can keep all of their property. Repayment plans can be expensive. Filers must have sufficient monthly income to meet this chapter’s debt-payment rules. (11 U.S.C. § 1322(d).)
• All filers will choose Chapter 13 when facing foreclosure, repossession, or loss of property in Chapter 7. Only Chapter 13 allows filers to catch up on past-due payments and stop foreclosure or repossession. Also, you can keep everything in Chapter 13, but it can be expensive. You must pay creditors the value of any property you’d lose in Chapter 7. (11 U.S.C. § 1325.)

Tip for Business Owners: Most businesses don’t file for Chapter 7 or 13. Instead, consider Chapter 11 or Chapter 11 Subchapter V for small businesses. Also, be sure you understand that a personal filing could negatively affect your company and any partners.

Do I Qualify for Bankruptcy?

Chapter 7 debtors qualify if their gross income is less than the state’s median income for the family’s size. It’s just a matter of simple math and checking a chart. But that's just the first way of passing the means test and qualifying for Chapter 7. If you don’t pass that first hurdle, you’ll have a second chance to lower your gross income by deducting expenses. (11 U.S.C. § 707(b).)

Qualifying for Chapter 13 isn’t ever simple, and because of the numerous complicated rules, you’ll want to work with a bankruptcy lawyer. Until then, you can learn about the Chapter 13 repayment plan and get an idea about whether you make enough income to cover what you’ll have to pay. Or try out this Chapter 13 repayment plan calculator. It’s not perfect, but it will show you what you must pay (you might have to pay more).

How the Bankruptcy Process Works

Soon after you file your “petition” or bankruptcy paperwork, calls, letters, wage garnishments, and even collection lawsuits should come to a halt. It happens because of the “automatic stay” order the court immediately puts in place. (11 U.S.C. § 362.)

Next, the court will ensure the information in the petition is correct. You’ll turn over bank statements, paycheck stubs, tax returns, and other documents for the bankruptcy trustee’s review. All filers will attend a “341 meeting of creditors.” The trustee will check your identification at the meeting and ask questions about your filing. Creditors can appear and ask questions, too, but they rarely do. (11 U.S.C. § 341.)

Chapter 13 filers or counsel will also need to attend a confirmation hearing. The judge will review any objections to your proposed repayment plan and decide whether it meets all requirements to be approved or “confirmed.” (11 U.S.C. § 1325.)

Filers must also complete two educational courses. You’ll take the credit counseling course before you file your case. You must take a debt management class before you receive the discharge wiping out qualifying debt. (11 U.S.C. § 109(h); 11 U.S.C. § 111.)

What Does Bankruptcy Cost?

Filing fees are $338 for Chapter 7 and $313 for Chapter 13 (as of 2026). Low-income filers can apply to have the Chapter 7 fee waived or pay it in installments. Attorney fees are a separate cost, and, given the complexity of the process, most filers benefit from hiring one. Learn more about whether you need a bankruptcy lawyer.

What Happens to Your Credit After Bankruptcy?

A Chapter 7 bankruptcy stays on your credit report for ten years from the filing date; Chapter 13 stays for seven years. The impact fades over time, especially if you take steps to rebuild. Common strategies include opening a secured credit card, making all payments on time, and keeping balances low. Many filers see meaningful credit improvement within two to three years of discharge.