Bankruptcy

What It Means

Bankruptcy is a legal process in federal court for people and businesses that can't pay their debtsLiabilitiesDebts and other money you owe, such as a mortgage, a car loan or a credit card balance. Your assets minus your liabilities is your net worth. See more. The two chapters most individuals use are Chapter 7Chapter 7 bankruptcyA form of bankruptcy in which a court trustee sells property the law doesn't protect to pay creditors, and most remaining debts are discharged, usually within months. See more, in which a trustee sells property the law doesn't protect and pays creditors from it, and Chapter 13Chapter 13 bankruptcyA form of bankruptcy in which you keep your property and repay creditors through a court-approved plan lasting three to five years. See more, in which you keep your property and repay creditors through a court-approved plan over three to five years. At the end, the court can grant a discharge, which ends your personal liability for the debts it covers. Filing also triggers an automatic stay that stops most collection while the case runs.

How People Say It

• "Our lawyer thinks we qualify for Chapter 7."
• "We're in year two of a Chapter 13 plan."
• "The calls stopped the day we filed."

The Breakdown

What the rule says. Bankruptcy is governed by the federal Bankruptcy Code and handled by bankruptcy courts. Its chapters do different jobs: Chapter 7 is liquidation, Chapter 11 is reorganization used mostly by businesses, Chapter 12 is for family farmers and fishermen, and Chapter 13 is a repayment plan for people with regular income. A discharge wipes out your personal liability for the debts it covers, but some debts survive; in Chapter 7, U.S. Courts lists alimony, child support, certain taxes and certain student loansStudent loanMoney borrowed to pay for college or career school, repaid with interest after you leave school; it comes from the federal government or a private lender. See more made or guaranteed by a government unit among them.

Who it applies to. Individuals filing Chapter 7 face a means test that compares their income with their state's median, and the U.S. Trustee Program's latest median figures apply to cases filed on or after April 1, 2026. Chapter 13 suits people with steady income who want to keep property, such as a home.

Documents needed. A petition, schedules listing your assets, debts, income and expenses, a statement of your financial affairs, and a certificate showing you completed credit counselingCredit counselingAdvice from a trained counselor, usually at a nonprofit agency, on your budget and debts, which can lead to a debt management plan or other next steps. See more from an approved agency within 180 days before filing. Before discharge, you'll also need proof you finished a debtor education course.

Official source. U.S. Courts' Bankruptcy Basics pages, and the U.S. Trustee Program's counseling and means test pages, checked September 30, 2026.

Good to Know

Bankruptcy is a legal case with lasting effects, so talk to a bankruptcy attorney or your local legal aid office about your situation before you file. Experian and TransUnion both say a Chapter 7 bankruptcy can stay on your credit report for up to 10 years from the filing date and a Chapter 13 for seven, and that its effect on scores fades over time. Compare the other options first: a debt management planDebt management planA repayment plan set up by a credit counseling organization: you make one monthly payment to it, and it pays your creditors, often at lower rates. See more through a nonprofit credit counselor repays debts in full at lower rates, and debt settlementDebt settlementPaying a creditor a lump sum that's less than the full balance, often through a for-profit company, in exchange for the creditor treating the debt as resolved. See more pays less than you owe but can bring fees, taxes and damage of its own.

Related Terms and Categories

• Chapter 7 bankruptcy

  A form of bankruptcy in which a court trustee sells property the law doesn't protect to pay creditors, and most remaining debts are discharged, usually within months.

• Chapter 13 bankruptcy

  A form of bankruptcy in which you keep your property and repay creditors through a court-approved plan lasting three to five years.

• Credit counseling

  Advice from a trained counselor, usually at a nonprofit agency, on your budget and debts, which can lead to a debt management plan or other next steps.

• Debt settlement

  Paying a creditor a lump sum that's less than the full balance, often through a for-profit company, in exchange for the creditor treating the debt as resolved.

• Debt management plan

  A repayment plan set up by a credit counseling organization: you make one monthly payment to it, and it pays your creditors, often at lower rates.

• Credit report

  A record of how you've borrowed and repaid, kept by credit bureaus and sold to lenders, landlords, insurers and others who decide whether to deal with you.

Debt and credit