People and businesses dealing with unmanageable debt may be able to turn to bankruptcy as a legal solution. In this process, the debtor files a petition with a bankruptcy court and requests relief from debt liabilities. Bankruptcy courts approve these petitions in the majority of cases. Icon

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What Is Bankruptcy?

Bankruptcy is a legal process designed to provide debt relief to individuals, businesses, and other entities struggling with overwhelming debt.

This process allows debtors to reorganize their financial affairs and obtain a fresh start, while also providing protection from creditors.

While bankruptcy can be a complex and difficult process, it can also be a valuable tool for people and companies facing financial hardship.

Limitations of Bankruptcy

Bankruptcy can be an effective way to resolve overwhelming debt, but it has limitations.

For example, bankruptcy can be used to discharge many types of unsecured debt, stop collection efforts, allow debtors to keep some or all of their property, and provide a fresh start. However, bankruptcy cannot eliminate secured debts (a debt backed by collateral) unless the property is surrendered.

Additionally, it cannot eliminate certain debts such as child support, alimony, and tax debts, as well as debts from fraud or wrongdoing.

Debts that cannot be forgiven in bankruptcy:

  • Child support and alimony payments
  • Court fines and criminal restitution payments
  • Debts incurred through fraud or intentional wrongdoing
  • Most tax debts, including those owed to the Internal Revenue Service (IRS) or state taxing authorities
  • Student loans, unless the debtor can prove undue hardship

Types of Bankruptcy

Bankruptcy cases can be filed under different parts of the U.S. Bankruptcy Code, including Chapter 7, Chapter 11, and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a liquidation process in which assets are sold to pay off debts, and unsecured debts are discharged. Chapter 7 bankruptcy is only available to people with a low income — generally below the median income for your household size in your state.

Did you know?

Chapter 7 is the most common type of bankruptcy.

Though assets can be sold to pay off debts, each state has a list of assets that are not allowed to be sold. Some states allow you to choose between the state or federal exemptions list.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a reorganization process — usually for businesses — to restructure and continue operating while repaying creditors.

The court will work with the company to restructure debts and assets while leaving the business to operate as normal.

The exception to this is when the business has been forced to declare bankruptcy due to fraud or illegal behavior. In that case, the court will appoint a trustee to manage the business through the bankruptcy.

Many well-known companies have declared Chapter 11 bankruptcy and continued to operate throughout the process. These include:

  • General Motors
  • K-Mart
  • Marvel Entertainment

Individuals can file for Chapter 11 bankruptcy as well, but this is rare. It is usually only allowed for people who don’t qualify for Chapters 7 or 13 but meet the requirements to file under Chapter 11.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a repayment plan for individuals to pay off debts over three to five years while keeping their assets. In order to qualify, you must have enough disposable income to afford the repayment plan and your debt must be below the federal limit.

Currently, the limits are just below $400,000 for unsecured debts — debts without collateral — and a bit over $1 million for secured debts.

To learn which type of bankruptcy applies to your situation, it may be helpful to speak with a bankruptcy lawyer.

How Bankruptcy Works

Bankruptcy allows individuals and businesses to address their financial struggles and debts.

The process usually involves a court proceeding in which the debtor’s financial situation is assessed and a plan is put in place to address any debts.

Stops Creditors From Taking Negative Action

One of the significant benefits of filing for bankruptcy is a debtor protection called the automatic stay.

The automatic stay is a court order that stops creditors from taking negative actions against a debtor, such as foreclosing on a home, repossessing a car, or garnishing wages.

It provides debtors with temporary relief from collection efforts and can give them time to reorganize their finances.

Affects Your Credit Score

Bankruptcy can have a negative impact on a debtor’s credit score.

Did you know?

A bankruptcy filing can remain on a credit report for up to 10 years, and it can make it difficult to obtain credit in the future.

However, many people who file for bankruptcy already have poor credit scores, and bankruptcy can be a way to start rebuilding credit by demonstrating a commitment to repaying debts.

Minimizes Personal Liability

Bankruptcy can minimize personal liability by discharging or eliminating many types of unsecured debt. This means the debtor is no longer responsible for paying off those debts.

Additionally, bankruptcy can provide debtors with a fresh start by allowing them to reorganize their finances and get a handle on their debt.

However, not all debts can be discharged through bankruptcy, and some personal liability may still exist after the bankruptcy process is complete.

Who Can Declare Bankruptcy?

Individuals and businesses facing overwhelming debt may be eligible for bankruptcy.

This includes people who are struggling with:

  • Credit card debt
  • Medical bills
  • Personal loans
  • Other unsecured debts

In addition, people may be eligible to file a case in bankruptcy court if they are facing foreclosure or repossession of assets such as a car.

However, eligibility for bankruptcy usually depends on several factors, including the type of bankruptcy being filed, the amount of debt owed, and the debtor’s income.

You may qualify for bankruptcy if you:

  • As an individual or business, owe more than you can pay
  • Have a financial situation that makes it difficult for you to pay your debts
  • Have received credit counseling from an approved agency within 180 days of filing for bankruptcy
  • Have completed a means test to determine eligibility for Chapter 7 bankruptcy
  • Are not registered as having attempted bankruptcy fraud

Eligibility requirements may vary depending on the type of bankruptcy being filed and the individual’s specific financial situation, which may lead to certain exemptions.

Consulting with a bankruptcy attorney can help determine if you are eligible to file for bankruptcy and provide you with the best possible legal advice for moving forward with your situation.

Illustration with two cartoon men looking at a chart with a declining arrow

Hear From the Experts on Navigating Bankruptcy

Our team at would never advise listening to only one voice on such a complicated and impactful topic as bankruptcy, so we’ve asked experts to weigh in. These professionals have agreed to share their perspectives through some pressing questions on the topic.

  1. What should people know about filing for bankruptcy — either for themselves or a business — and the impact it can have in the future?
  2. What are some alternatives to filing for bankruptcy that people should explore?
  3. Who needs a lawyer when filing for bankruptcy? Is there any circumstance where an individual, family, or business could handle bankruptcy without professional guidance?
  4. What advice would you give to anyone struggling financially and considering bankruptcy?
Select an expert to view their answers:

Is Bankruptcy Common in the United States?

Recent bankruptcy statistics indicate a decrease in bankruptcy filings in the U.S.

According to the Administrative Office of the U.S. Courts, there were 413,616 bankruptcy filings in 2021, which is a 24% decrease from 2020.

A decline has also been observed in business bankruptcy filings, which fell 33.7% from 21,655 to 14,347.

The decrease in bankruptcy filings was consistent across all bankruptcy types:

  • Chapter 7 bankruptcy, which is the most common type of bankruptcy, accounting for 69% of filings, dropped from 378,953 in 2020 to 288,327 in 2021.
  • Chapter 13 bankruptcy, which allows for debt repayment plans, dropped to 120,002 filings from 156,377 in 2020.
  • Chapter 11 bankruptcy, typically used for large or small business reorganization, also decreased from 8,333 to 4,836 in 2020.

When to Consider Filing Bankruptcy

Bankruptcy may be an option to consider if you are unable to pay your bills, facing wage or bank account garnishment, or at risk of losing your home due to missed mortgage payments.

Additionally, if you are overwhelmed by significant amounts of unsecured debt or facing legal action, filing for bankruptcy debt relief may be the best option.

However, it is a serious decision that should not be taken lightly.

Consulting with a bankruptcy attorney can help you determine if bankruptcy is the best course of action for your financial situation.

An experienced bankruptcy lawyer can guide you through the bankruptcy process and help you take advantage of options that may be available to help manage your debt.

Reasons People File for Bankruptcy

Bankruptcy is a tool that can help individuals in financial distress get back on their feet, but it should always be a last-resort option.

Here are some reasons people file for bankruptcy.

Job Troubles

Job loss, reduction in income, or unemployment can make it challenging for a person to keep up with their bills and debts and lead to financial struggles.

High Medical Bills

Medical expenses can be a major financial burden, especially if a person lacks adequate health insurance coverage.

Serious injuries or illnesses can lead to significant medical bills, and some people may turn to bankruptcy to manage their medical debt.


Divorce can be a stressful and emotional time, and it can also be a financial burden.

Divorce proceedings can result in significant legal fees and expenses, property division, and a change in household income that may make it challenging to manage debt.

Emergencies & Life Changes

Unexpected emergencies or life changes, such as natural disasters, accidents, or the death of a family member, can have a significant impact on a person’s finances.

These events can lead to unexpected expenses and a loss of income, making it difficult to keep up with bills and debts.

Lack of Financial Skills

Lack of financial skills or knowledge can also lead to financial difficulties. Poor budgeting habits, overspending, and accumulating debt can all contribute to financial distress.

Filing for bankruptcy may be an option for people who struggle with managing their finances and debts.

How to File for Bankruptcy

Filing for bankruptcy can be a complex process. Understanding the steps involved can help ensure that the process goes smoothly.

The basic steps of filing for bankruptcy are outlined below.

1. Gather Financial Records & Statements

The first step in filing for bankruptcy is to gather all of your financial records and statements.

This includes bank statements, tax returns, and information on your debts and assets.

This information is necessary to complete the bankruptcy forms, so it’s important to have everything organized and readily available.

2. Seek Credit Counseling

Before filing for bankruptcy, you must complete credit counseling with an approved agency.

This counseling session helps you understand your financial situation and explore alternatives to bankruptcy.

Did you know?

Credit counseling must be completed within 180 days prior to filing for bankruptcy.

3. Reach out to a Bankruptcy Lawyer

Filing for bankruptcy can be a complicated process, and it’s recommended that individuals seek the advice of a bankruptcy lawyer.

A bankruptcy lawyer can help people understand their options, prepare the necessary paperwork, and navigate the bankruptcy process.

4. File Your Bankruptcy Claim

Once you’ve completed credit counseling and have gathered your financial records, you can file your bankruptcy claim.

This involves filling out the necessary bankruptcy forms and submitting them to the bankruptcy court.

There are different types of bankruptcy, but a lawyer can help you understand which type is appropriate for your situation.

5. Attend Meeting With Creditors

After filing for bankruptcy, you must attend a meeting with your lenders and creditors.

This meeting is typically held within a few weeks of filing for bankruptcy and is an opportunity for creditors to ask questions about your financial situation.

It’s important to attend this meeting as it’s a requirement of the bankruptcy process.

Pros vs. Cons of Bankruptcy

While bankruptcy can offer a fresh start to those who are struggling with debt, it’s important to understand both the pros and cons of filing for bankruptcy before making the decision to file.

3 Pros of Filing for Bankruptcy

Here are some of the greatest advantages of filing for bankruptcy.

1. Elimination of Debts

One of the biggest benefits of filing for bankruptcy is that it can eliminate certain types of debts, such as credit card debt, medical bills, and personal loans.

This can provide you with a fresh start and help you move forward financially.

2. Protection From Creditors

Filing for bankruptcy also provides people with protection from creditors. Once the bankruptcy process has begun, creditors are prohibited from pursuing collection activities, such as making harassing phone calls or garnishing wages.

3. Automatic Stay

An automatic stay goes into effect when you file for bankruptcy. This means that creditors cannot start or continue to take action against you or your property.

3 Cons of Filing for Bankruptcy

Here are some of the drawbacks of filing for bankruptcy.

1. Negative Impact on Credit

Filing for bankruptcy will have a negative impact on your credit score. This can make it more difficult to obtain credit in the future and may result in higher interest rates.

2. Public Record

Bankruptcy filings are public records, which means that anyone can access information about your bankruptcy case.

3. Loss of Assets

Depending on the type of bankruptcy, you may be required to give up certain assets, such as a home or car. This can be a difficult decision to make and can have a significant impact on your quality of life.

What to Look for in a Bankruptcy Law Firm

When choosing a bankruptcy law firm, consider several factors. Look for a firm with a proven track record and experience in handling bankruptcy cases.

Choose a law firm that specializes in bankruptcy law and has a good reputation.

It’s important to receive personal attention and good communication from the law firm, so choose a firm that values those qualities.

Overall, finding the right bankruptcy law firm can provide you with the guidance and support you need to navigate the complex process of filing for bankruptcy.

Find Legal Help With Filing Bankruptcy Today

If you’re considering filing for bankruptcy, seek legal help as soon as possible.

An experienced bankruptcy law firm can help guide you through the bankruptcy process and ensure that your rights are protected.

Don’t wait until your financial situation gets worse. Reach out to a bankruptcy law firm today to schedule a consultation and learn more about your options.

With the right legal help, you can take steps toward financial stability and a fresh start.

FAQs About Bankruptcy

What are some alternatives to filing bankruptcy?

There are several alternatives to filing for bankruptcy that you can consider if you’re struggling with debt.

Debt consolidation, debt settlement, credit counseling programs, and restructuring or refinancing debt are some options you can explore.

What happens when you declare bankruptcy?

When you file a bankruptcy petition, a court-appointed trustee will review your financial situation, assets, and debts to determine what can be used to repay your creditors.

Depending on the type of bankruptcy you file for, your assets may be liquidated to pay off your debts or you may be put on a payment plan to repay your debts over time.

After your debts are resolved or discharged, you’ll be able to start fresh with a clean financial slate.

How long does bankruptcy last?

The length of a bankruptcy case can vary depending on the type of bankruptcy code filed:

  • Chapter 7 bankruptcy typically lasts about 3-6 months
  • Chapter 13 bankruptcy can last from 3-5 years
  • Chapter 11 bankruptcy, which is typically filed by businesses, can last for several years

A bankruptcy will remain on your credit report for a period of 7-10 years, depending on the type of bankruptcy filed.

Can you get a credit card after going bankrupt?

Yes, you can get a credit card after going bankrupt. However, it can be more difficult to qualify for a credit card, and you may be subject to higher interest rates and fees.

Many credit card companies offer secured credit cards, which require a security deposit, as a way to rebuild credit after bankruptcy.

Still, you should use credit responsibly and make payments on time in order to rebuild your credit score.

Can bankruptcy affect my spouse?

Bankruptcy can affect a spouse in several ways, depending on the state where the couple lives and the type of bankruptcy.

If only one spouse files for bankruptcy, the non-filing spouse’s credit score may be impacted if they have joint debts or accounts with the filing spouse.

Additionally, in community property states, the non-filing spouse’s assets and income may be considered as part of the filing spouse’s bankruptcy case.

Does bankruptcy affect my job?

In most cases, bankruptcy should not affect your current job. Employers are prohibited from discriminating against employees or potential hires based solely on bankruptcy filings.

Can bankruptcy affect my retirement plan?

In general, retirement plans such as 401(k)s, pensions, and IRAs are protected in bankruptcy proceedings. These funds are typically exempt from being used to pay off creditors. Icon

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  1. U.S. Courts. “Annual Bankruptcy Ratings Fall 29.7 Percent.” Retrieved March 8, 2023 from
  2. U.S. Courts. “Chapter 13: Bankruptcy Basics.” Retrieved March 8, 2023 from
  3. U.S. Courts. “Chapter 13: Bankruptcy Dismissal vs. Bankruptcy Discharge.” Retrieved March 8, 2023 from
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