What Is Bankruptcy? What to Know

Bankruptcy lawfully allows individuals or businesses who are unable to repay their debts to seek relief through court-supervised reorganization or liquidation (sales) of assets. It provides a fresh financial start for debtors while ensuring fair treatment of creditors, but experts say it should be a last resort to settle your financial woes.

If you feel overwhelmed by your financial situation, it’s a good indication that it might be time to consult a bankruptcy lawyer. While bankruptcy often carries a stigma, it’s important to set aside those concerns and focus on finding a solution that can provide relief. Everyone's financial journey is different, and your personal limits for stress and hardship should guide your decision.

“The biggest misconception, by far, is that bankruptcy is a BAD thing,” said Adrienne Hines, author of “Bankruptcy Magic: The Life-Changing Power of Debt Relief with Dignity” and a bankruptcy and workers compensation attorney with Wisehart & Wright, Co., LLC, in Sandusky, Ohio.  “Bankruptcy is just one tool in the financial toolbox. Being smart about your options and exploring your choices are more important than being embarrassed or ashamed.”

How Does Bankruptcy Work?

To understand bankruptcy, you’ll need to be familiar with some financial terms, including:

• Debtor: An individual or organization that owes money, goods, or services to another party.
• Creditor: A bank, individual, business or other organization that lends money, extends credit, or provides services with the expectation of being repaid, usually with interest.
• Trustee: A court-appointed, impartial individual who oversees a debtor’s estate during bankruptcy, managing the administration of the case, verifying financial information, and distributing payments to creditors.
• Discharge: A court order that releases a debtor in bankruptcy from liability for specific debts and prohibits creditors from continuing to try to collect them.
• Liquidation: The process in which some of a debtor’s assets are sold to pay off creditors.
• Secured debt: Debt that is backed with collateral such as a home or vehicle, which a creditor can take if you default on a loan.
• Unsecured debt: Money you owe for which there is no collateral, such as credit card debt.

Bankruptcy gives creditors an opportunity to be at least partially repaid when assets belonging to an individual or business are liquidated, meaning the assets are converted into cash which is then turned over to the debtholders.

All bankruptcy cases are filed in federal court. Judges examine the bankruptcy filing to determine a debtor’s eligibility and then decide whether to discharge that debt.

A trustee is appointed to represent the debtor’s estate. Most cases are handled between the judge and trustee and don’t require the debtor to appear in the court proceedings.

A decision can be made to discharge, meaning the debtor is no longer legally responsible for paying those debts. Or the judge could dismiss the filing if he or she believes the individual or business has the means to pay their debts.

“When you file for bankruptcy, you are taking the first step in creating a plan to begin your journey toward a new financial life,” said Scott Glatstian, who leads the Estate Planning and Bankruptcy practices at Rosenblum Law.

» Learn More: Can Bankruptcy Be Denied?

Filing for bankruptcy can be a saving grace for people drowning in debt. The numbers support that contention. The American Bankruptcy Institute says that 95.3% of people in Chapter 7 bankruptcy are successful when they are represented by an attorney, and US. Bankruptcy Court statistics show an even higher percentage in Chapter 7 cases that aren’t dismissed or converted into another type of bankruptcy

As you’ll see below, you might have to qualify for Chapter 7 bankruptcy based on your income. You can use the bankruptcy calculator below to estimate Chapter 7 qualification and cost.

Types of Bankruptcy

There are six types of bankruptcy – Chapters 7, 9, 11, 12, 13 and 15 – each designed to address different financial situations. Understanding these options can help individuals and businesses choose the best path to resolve their debts and regain financial stability. Chapter 7 and Chapter 13 are by far the most common types of bankruptcy, accounting for over 98% of bankruptcy filings based on early 2026 data.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is generally the best option for those with a low income and few assets. Historically, it’s been the most widely used type of bankruptcy because it’s comparatively inexpensive and provides the quickest debt relief. That trend is continuing, as Chapter 7 filings increased by 17% in the first quarter of 2026 over the first quarter of 2025, according to data from Epiq AACER published by the American Bankruptcy Institute.

A successful Chapter 7 bankruptcy can erase unsecured debts in 4-6 months. You also could be permitted to keep key assets considered “exempt” property, though non-exempt property will be sold to repay part of your debt. Just know that property exemptions vary state-to-state.

By the end of a successful Chapter 7 filing, the majority (or all) of your debts will be discharged, meaning you won’t have to repay them. Some debts that won’t be discharged in bankruptcy include alimony, child support, some types of unpaid taxes and most types of student loans.

Chapter 7 bankruptcy stays on your credit report for 10 years and significantly reduces your credit score, but your score could improve over time as you rebuild your finances.  While some individuals might not qualify due to high income, others simply can’t afford Chapter 7 bankruptcy due to the fees and expenses.

Chapter 13 Bankruptcy

Chapter 13 bankruptcies made up about 36.5% of non-business bankruptcy filings in 2025, and Chapter 13 filings were up 8% in the first quarter of 2026 over the same time frame a year earlier.

A Chapter 13 bankruptcy involves reorganizing your finances so you can repay some debts in order to have the rest forgiven. This is an option for people who do not want to give up their property or do not qualify for Chapter 7 because their income is too high.

People can only file for bankruptcy under Chapter 13 if they have less than $526,700 in unsecured debt in cases filed between April 1, 2025, and March 31, 2028.

They must have less than $1,580,125 in secured debt (houses and cars, for example) for cases filed between those same dates.

Under Chapter 13, you must design a 3–5-year repayment plan for creditors. Once you successfully complete the plan, the remaining debts are erased.

However, most people do not successfully finish their plans. When this happens, debtors may then choose to pursue a Chapter 7 bankruptcy. If they don’t succeed, creditors can resume their attempts to collect the full balance owed.

Chapter 11 Bankruptcy

Chapter 11 is often referred to as “reorganization bankruptcy” because it gives businesses a chance to operate while they restructure the debts and assets to pay back creditors.

This is used primarily by large corporations but can apply to any size of business, including partnerships and in some rare cases, individuals. Though the business continues to operate during bankruptcy proceedings, most business decisions require court permission.

There were 9,201 Chapter 11 filings in 2025, up from 8,884 in 2024. And, as with filings for both Chapter 7 and Chapter 13, the first quarter of 2026 saw a dramatic increase in Chapter 11 filings – 37% more than during the first quarter of 2025.

Other Bankruptcy Filing Types

• Chapter 9: This proceeding provides financially distressed municipalities – cities, townships, school districts, etc. – with protection. It creates a plan to resolve the debt between the municipality and its creditors.
• Chapter 12: This is designed for financially distressed “family farmers” and “family fisherman.” The person in debt devises a plan to pay back creditors over 3-5 years.
• Chapter 15: Added to the code in 2005, Chapter 15 bankruptcy provides for cooperation between U.S. courts and foreign courts in the event foreign bankruptcy filings affect financial interests in the U.S.

The number of filings across the so-called ‘commercial’ bankruptcies (non-Chapter 7 or 13) also rose during the first quarter of 2026, up 14% overall from the first three months of 2025 in large part due to the toll taken by inflation.

How to File for Bankruptcy

Bankruptcy will only work for you if it’s handled correctly, so it’s as important to know what not to do while filing bankruptcy as it is knowing the proper steps to have a successful filing. That starts at the very beginning, because whether you get the opportunity to go through it at all is up to the bankruptcy court, not you. Educate yourself, then, before you file. If nothing else, that will keep you from being surprised by the filing and attorney fees you’ll likely face.

You can file for bankruptcy on your own or you can find a bankruptcy lawyer, which most experts regard as the most prudent avenue for navigating what can be a confusing and complicated process. American Bankruptcy Institute statistics show much higher success rates when the debtor is represented by an attorney. If you can’t afford to hire an attorney, you may have options for free legal services. If you need help finding an affordable bankruptcy lawyer or locating free legal services, check with the American Bar Association for resources and information.

The steps for filing bankruptcy are:

1. Compile financial records: List your debts, assets, income, and expenses. This gives you, anyone helping you, and eventually the court, an accurate understanding of your situation.
2. Get credit counseling within 180 days before filing: You can’t file for bankruptcy until you’ve gone through a required bankruptcy counseling. It assures the court you have exhausted all other possibilities before filing for bankruptcy. The counselor must be from an approved provider listed on the U.S. Courts website. Most credit counseling agencies offer this service online or over the phone, and you receive a certificate of completion once it’s done that must be part of the paperwork you file. If you skip this step, your filing will be rejected.
3. File the petition: If you haven’t hired a bankruptcy lawyer yet, this might be the time. Legal counsel is not a requirement for individuals filing for bankruptcy so you can try to file bankruptcy on your own, but you are taking a serious risk. Understanding federal and state bankruptcy laws is essential. Judges are not permitted to offer advice. Neither are court employees. There are many forms to complete and some important differences between Chapter 7 and Chapter 13. Not knowing proper procedures and rules could ruin your case. Without legal advice, you risk the bankruptcy trustee seizing and selling your property.
4. Meet with creditors: When your petition is accepted, an appointed trustee sets up a meeting with your creditors. You must attend but your creditors are not required to be there. It’s an opportunity for them to ask you or the court trustee questions about your case.

» Learn More: Can You File Bankruptcy Online?

Pros and Cons of Bankruptcy

There are many good reasons for filing bankruptcy, but there are plenty of reasons for avoiding it, too, if possible.

Here are the pros and cons of filing bankruptcy:

Pros	Cons
Automatic stay	Future credit obstacles
Stops collection harassment	Could cost $1,000-$2,000
Debt relief	Some debts aren’t discharged
Help from trustee	On credit report 7-10 years
Some assets protected	Could lose some assets

Pros of Bankruptcy Explained

• The “automatic stay” provision in bankruptcy law means creditors cannot pursue action against you until the bankruptcy is discharged.
• Harassing phone calls from creditors stop.
• Filing bankruptcy provides a second chance to get your debt under control
• Depending on the type of bankruptcy filed, you might not have to repay some or all of your debt.
• A third-party court-appointed trustee will handle communication with your creditors and operate on your behalf.
• You can keep some protected assets in Chapter 7. In Chapter 13, you typically keep all your assets while repaying debt.
• Chapter 13 could allow you to prevent a foreclosure or auto repossession.
• Filing for bankruptcy impacts your credit score but your score could rebound as you go through the process of settling, especially if you consistently pay your bills after declaring bankruptcy.

Cons of Bankruptcy Explained

• A bankruptcy discharge could prevent you from getting new lines of credit and may even cause problems when you apply for jobs.
• Depending on the type of bankruptcy filed, you could lose valuable assets, including your car and home.
• If federal student loans are the bulk of your debt, filing for bankruptcy won’t help. Only in rare cases is student debt dischargeable through a bankruptcy filing.
• The cost of filing bankruptcy is typically between $1,000-$2,000 if you don’t qualify for legal aid.
• Filing for bankruptcy stays on your credit report for 7-10 years.
• If friends and family members have co-signed loans, they could be liable for repaying your debt in a bankruptcy filing.
• You could have trouble gaining future credit, or you’ll only be offered higher interest credit, because you filed for bankruptcy.
• Bankruptcies are public information and could haunt you in future transactions or job interviews.
• While bankruptcy can be a lifeline, it also typically does not address the source of your financial distress.
• Because of the long-term consequences of bankruptcy, some experts say you need at least $15,000 in debt for bankruptcy to be beneficial.
• While bankruptcy can eliminate some debts, others—like student loans, child support, and some taxes—are usually not dischargeable.

» Learn More: How to File for Bankruptcy and Keep Your Car

Is Bankruptcy Right For Me?

When asking, “Should I file for bankruptcy?” think hard about how long it would realistically take to pay off your debt.

The bankruptcy code wasn’t designed to punish people forever. If some combination of bad luck and bad choices has devastated your finances – and you don’t see that changing in the next five years -- bankruptcy could be your best option.

Even if you don’t qualify for bankruptcy, there is still hope for debt relief. Possible alternatives include a debt management program, a debt consolidation loan or debt settlement. Each typically requires 3-5 years to reach a resolution. None guarantees complete elimination of debt.

Before deciding, it would also be wise to contact a credit counseling agency. Credit counselors can provide a debt analysis and personalized action plan based on your income and the amount and type of debt you’re carrying. Most consultations can be done in a 30-minute phone call and provide important insight into whether bankruptcy vs. credit counseling is the right path for you.

Don’t be misled by how long Chapter 7 bankruptcy takes – the process itself is only 4-6 months. Instead, remember bankruptcy carries significant long-term penalties. It remains on your credit report for 7-10 years and makes it difficult to get future loans at reasonable rates.

The flip side is there is a great mental and emotional lift when all your debts are eliminated, and you’re given a fresh start.

» Learn More: Debt Relief vs Bankruptcy

Common Reasons for Filing Bankruptcy

Bankruptcy sometimes stems from unavoidable circumstances, or as a consequence of decisions beyond one’s total control.

“One of the biggest misconceptions about filing bankruptcy is that it means an individual has failed financially or is irresponsible with their finances,” said Lyle Solomon, principal attorney at Oak View Law Group in California.

Here is a list of the most common reasons for filing bankruptcy:

• Divorce: The legal costs can sink you financially, over and above the other disruptive fallout of marriage dissolution.
• A mountain of medical bills: Unpaid medical bills are tied to 60%-65% of personal bankruptcies, according to Elizabeth Fowler, a distinguished scholar in Health Policy and Management at the Bloomberg School of Public Health at Johns Hopkins. Similarly, a 2022 Roosevelt Institute study found that 62% of bankruptcies were attributed in part to medical debt.
• Poor financial decisions: Excessive credit card use, often because of other budgeting issues, is another leading reason for bankruptcy filings.
• Job loss: If you don’t have a rainy-day fund – and many people don’t – job loss is a hole in the ceiling allowing debt to pour in.
• Unexpected emergencies: Theft or loss of property, natural disasters, etc., seem to happen when you are least prepared. If you’re already living on a razor’s edge, unexpected events become financial catastrophes.

Having debts discharged through bankruptcy is a safe, legal and practical choice.  Choosing the right time, if possible, can help.

“When you are facing something like a foreclosure or a garnishment, bankruptcy tends to be one of the only options to stop those types of collection activities,” said Ashley Morgan of Ashley F. Morgan Law. PC in Herndon, Va. “So, sometimes your hand is forced about when to file.

“Alternatively, if you are not at one of those extremes, it is important to review your situation. If you are in a situation where you are living on credit because your pay is not enough to make ends meet, it may not be the right time to file. Most people won't have access to more than a small credit card or two for a while after bankruptcy.”

Consequences of Bankruptcy

Bankruptcy comes with baggage. Before you board the bankruptcy train, it’s best to be sure you can manage the heavy lift it takes to carry through with it and live beyond it.

Among the repercussions are:

• Your credit will be damaged generally, and your credit score will suffer specifically. A Chapter 7 bankruptcy can stay on your credit report for 10 years; for Chapter 13, it’s 7 years. At least for the first several years after your case ends, you’ll likely have trouble with approvals for loans, mortgages or credit cards. In the shorter term, your credit score can nosedive by 100-200 points.
• You might lose some of your property. Remember, part of the goal of bankruptcy is to repay your creditors, at least in part. You could be forced to sell off some of your assets to make that happen.
• A family member or friend who co-signed a loan might become responsible for paying some of that debt if it’s included in your bankruptcy.
• Because a bankruptcy is a public record, it can be a negative factor in future employment opportunities.
• There can be a social stigma attached to bankruptcy that could affect your self-image.
• You might not get free and clear from everything you owe. We’ll detail the debts that can’t be discharged in the next section.

Debts That Cannot Be Forgiven in Bankruptcy

Getting a “clean slate” through bankruptcy is a relative term. Bankruptcy does not erase all financial responsibilities.

It does not discharge the following types of debts and obligations:

• Federal student loans (unless you meet very strict criteria)
• Court-ordered alimony and child support
• Debts that arise after bankruptcy is filed
• Some debts incurred in the six months before filing bankruptcy
• Some taxes
• Loans obtained fraudulently
• Debts from personal injury you caused while driving intoxicated
• Court and other government fines
• Debt for willful and malicious injury to a person or property

It also does not protect those who co-signed your debts. Your co-signer agreed to pay your loan if you didn’t or couldn’t pay. When you declare bankruptcy, your co-signer still may be legally obligated to pay all or part of your loan.

» Learn More: Can You File for Bankruptcy and Keep Your House?

Alternatives to Filing Bankruptcy

While bankruptcy can offer the best exit plan from crushing financial burden, it’s not a one-size-fits-all remedy.

If you’re uncomfortable with bankruptcy’s collateral damage to your credit score or some of the messier fallout of filing for bankruptcy, you might want to consider these alternatives:

• Call your loan servicer and inquire about a forbearance or loan modification.
• Negotiate with creditors on your own. Some creditors (looking to cut their losses) might agree to a repayment schedule that reduces your debt.
• Enter a debt management plan, typically offered by nonprofit credit counseling agencies. It’s one way to pay off high interest credit card debt and get your debt under control through financial planning and budgeting.
• Look into a debt consolidation loan, which allows a debtor to combine credit card debt with other debts in one monthly payment at a lower interest rate.
• Weigh the merits of debt settlement, an agreement reached between a creditor and a borrower in which a reduced payment is accepted as full payment. Just know debt settlement can damage your credit score along the same lines as bankruptcy.

If these options aren’t possible, it might be worth it to look into low-cost bankruptcy options.