What Is Bankruptcy and How Does It Work?

Bankruptcy is a federal legal process that gives people with unmanageable debt a way to get relief, either by wiping out eligible debts or restructuring them into a more manageable repayment plan. It's overseen by federal bankruptcy courts under the U.S. Bankruptcy Code, and it's more common than many people realize.

There were 608,511 bankruptcy filings for the 12-month period ending June 30, 2026, up 12.2% from the prior year, according to the Administrative Office of the U.S. Courts.

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Key Takeaways

• Bankruptcy is a federal legal process: Federal courts handle it under the Bankruptcy Code, giving people with overwhelming debt a structured path to relief.

• Two chapters apply to most people: Chapter 7 typically discharges most eligible debts within about four to six months for straightforward cases, while Chapter 13 restructures debt into a three- to five-year repayment plan.

• Not all debt can be erased: Student loans, child support, alimony and most recent tax debt typically survive bankruptcy, no matter which chapter you file.

• An automatic stay takes effect immediately: Most collection actions, including calls, lawsuits and wage garnishments, must stop when you file, with some exceptions.

• Filings keep climbing: Total filings have risen every quarter since mid-2022, though they remain far below the 2010 peak of nearly 1.6 million.

• Bankruptcy affects your credit for years: A Chapter 7 filing can stay on your credit report for up to 10 years from the filing date, while completed Chapter 13 cases are typically removed after seven years.

Summary generated by AI, verified by MoneyLion editors.

By the Numbers: Bankruptcy Filings in the U.S.

The following figures cover bankruptcy filings, fees and timelines:

• Total filings: There were 608,511 bankruptcy filings for the 12 months ending June 30, 2026, up 12.2% year over year, according to the Administrative Office of the U.S. Courts.

• Filings by chapter: That period included 382,161 Chapter 7 filings and 215,490 Chapter 13 filings, or about 62.8% and 35.4% of all filings. Chapter 11 accounted for 10,320.

• Filing fees: Chapter 7 costs $338, Chapter 13 costs $313 and Chapter 11 costs $1,738.

• Chapter 7 timeline: About four to six months is typical for straightforward cases, though contested or asset cases can take longer.

• Chapter 13 timeline: Three to five years is the typical repayment period.

• Credit report impact: A bankruptcy can stay on your credit report for seven to 10 years from the filing date, depending on the chapter.

What Is Bankruptcy?

Bankruptcy is a legal process created by federal law that allows people, businesses and other entities to seek relief from debt they can't repay. It's governed by the U.S. Bankruptcy Code, Title 11 of the United States Code, and every case is filed in a federal bankruptcy court.

The goal is giving debtors a structured way to either eliminate qualifying debts or repay them under court supervision, while protecting creditors' interests through an orderly process.

For most people, bankruptcy is a last resort, considered when debt has become unmanageable and options like debt consolidation, payment plans or credit counseling haven't solved the problem.

What Happens When You File for Bankruptcy?

Several things happen right away when you file:

• A trustee is assigned: A bankruptcy trustee, an impartial official, is assigned to your case. Depending on the chapter, the trustee reviews your financial information, manages any assets involved and oversees payments to creditors.

• An automatic stay takes effect: This court order halts most collection actions against you, including creditor calls, lawsuits, wage garnishments and foreclosure proceedings, while your case is active. It doesn't eliminate the debt, but it creates breathing room.

• Required courses come into play: You must complete credit counseling from an agency approved by the U.S. Trustee Program within 180 days before filing, then a debtor education course from an approved provider before your debts are discharged.

For a deeper walk-through, including the meeting of creditors and what happens to your property, see MoneyLion's guide on what happens when you file.

What Types of Bankruptcy Are There?

The U.S. Bankruptcy Code is divided into numbered chapters, and six of them are types of bankruptcy: Chapters 7, 9, 11, 12, 13 and 15. Most cover businesses, municipalities, family farmers and international cases. For people dealing with personal debt, three matter most: Chapter 7, Chapter 13 and, less commonly, Chapter 11.

Chapter 7: Liquidation Bankruptcy

Chapter 7 is often called "liquidation bankruptcy." Most eligible unsecured debts, including credit card balances, medical bills and personal loans, are discharged, meaning you're no longer legally required to pay them. In exchange, a trustee may sell nonexempt assets to pay creditors.

What counts as exempt varies by state, but exemptions commonly protect these assets:

• Home equity: A portion of the equity in your home

• Vehicle: A car up to a certain value

• Retirement accounts: Most qualified retirement savings

• Household goods: Basic furnishings and personal items

• Tools of your trade: Equipment you need for work

In many Chapter 7 cases, exemptions protect some or all of a filer's property, so the trustee may have little or nothing to sell.

To qualify, you must pass the means test, which compares your income with the median income in your state for a household of your size.

• If your income is below the median, you generally skip the detailed expense calculation, though other eligibility rules still apply.

• If it's above, a closer review of your expenses and disposable income determines whether you qualify.

For straightforward cases, the process typically takes about four to six months from filing to discharge.

Chapter 13: Reorganization Bankruptcy

Chapter 13 is sometimes called the "wage earner's plan." Instead of discharging debts right away, you propose a repayment plan and make monthly payments to a trustee, who distributes the money to creditors. The plan generally lasts three years if your income is below your state's median and five years if it's above.

Chapter 13 is often the better option if you have assets you want to protect, especially a home facing foreclosure. It lets you catch up on missed mortgage payments through the plan while keeping the property, which Chapter 7 generally can't do.

To qualify, you need regular income, less than $526,700 in unsecured debt and less than $1,580,125 in secured debt. These limits apply to cases filed from April 1, 2025, through March 31, 2028.

Chapter 11: Business Reorganization

Chapter 11 is primarily a business tool, letting companies restructure debt and keep operating under a court-approved reorganization plan. Individuals can file too, but it's more expensive and complex than Chapter 7 or Chapter 13, with a $1,738 filing fee alone. People usually consider it only when their debts exceed Chapter 13's limits.

If you're weighing all three, MoneyLion's full chapter-by-chapter comparison breaks down eligibility, cost and timelines side by side.

Chapter 7 vs. Chapter 13: Side-by-Side Comparison

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What Bankruptcy Can and Can't Discharge

One of the most important things to understand before filing is that bankruptcy doesn't clear all debt. Some obligations survive no matter which chapter you file.

Debts That Can Typically Be Discharged

These debts can typically be discharged:

• Credit card balances: Most unsecured card debt

• Medical bills: Unpaid health care costs

• Personal loans: Unsecured personal loans

• Utility arrears: Past-due utility balances

• Some older tax debt: Certain older income taxes, subject to specific conditions

Debts That Generally Can't Be Discharged

These examples are common, not exhaustive. Section 523 of the Bankruptcy Code sets out the categories that are excepted from discharge, including the following:

• Family support: Child support and alimony

• Student loans: Most federal and private student loans, unless you prove undue hardship in a separate court proceeding

• Recent taxes: Recent income tax obligations

• Fines and restitution: Court fines and criminal restitution

• Fraud: Debts from fraud or similar misconduct

• Drunk driving injuries: Personal injury debts caused by drunk driving

Chapter 13's discharge is slightly broader than Chapter 7's. It can cover some debts Chapter 7 can't, like certain divorce property settlements and debts for willful and malicious injury to property.

If most of your debt falls into nondischargeable categories, bankruptcy may not provide the relief you're hoping for. Talking with a nonprofit credit counselor or bankruptcy attorney before filing can help you understand what your specific debts mean for your options.

The Automatic Stay: Immediate Protection When You File

One of the most immediate benefits of filing is the automatic stay. The moment your petition is filed, most collection activity against you must stop, including these actions:

• Collection contact: Calls and letters from creditors

• Lawsuits: Suits filed by creditors to collect

• Wage garnishments: Deductions from your paycheck

• Bank levies: Seizures of money in your accounts

• Foreclosure: Pending foreclosure proceedings, at least temporarily

• Utility shutoffs: Disconnections, for a limited period

The automatic stay isn't permanent or absolute. It lasts while your case is active, and creditors can ask the court to lift it in some situations.

It also doesn't cover everything. It generally doesn't stop criminal proceedings, child support enforcement or certain tax audits, and some evictions can proceed. A utility company can require a deposit or other assurance of payment within about 20 days to keep service on. Still, for many people, the stay provides immediate breathing room.

Why It Matters

The automatic stay and the discharge are the two biggest reasons people file, but they only help if you understand their limits. The stay buys time, not a permanent fix, and the discharge applies only to eligible debt. Knowing which of your debts survive before you file can save you from an unpleasant surprise months into the process.

How the Bankruptcy Process Works, Step by Step

Here's the process from start to finish:

1. Complete credit counseling: Within 180 days before filing, complete a session with an agency approved by the U.S. Trustee Program. Many sessions are available online or by phone.

2. File your petition: Submit a petition to your local federal bankruptcy court, along with schedules listing your assets, debts, income, expenses and recent transactions. Filing fees are $338 for Chapter 7 and $313 for Chapter 13. MoneyLion's breakdown of bankruptcy filing costs covers course costs and typical attorney fees. Fee waivers may be available for qualifying Chapter 7 filers, and you can pay in installments.

3. Attend the 341 meeting: A few weeks after filing, you'll attend a meeting of creditors, called a 341 meeting, where the trustee reviews your paperwork and creditors may ask questions. Most last only a few minutes.

4. Complete your case requirements: In Chapter 7, you'll complete a debtor education course. In Chapter 13, you'll make monthly payments under your approved plan for three to five years and complete the debtor education course.

5. Receive your discharge: In Chapter 7, eligible debts are typically discharged a few months after filing in straightforward cases. In Chapter 13, the discharge comes after you complete your repayment plan.

Who Typically Files for Bankruptcy?

Many filers are dealing with circumstances largely outside their control, like a major medical event, a job loss, a divorce or a business failure. Filings have risen every quarter since bottoming out at 380,634 in June 2022, though totals remain far below the 2010 high of nearly 1.6 million.

If you're considering bankruptcy, remember that hundreds of thousands of people go through this process each year. It's a legal tool designed to give people a structured path forward. If you're unsure whether it fits your situation, MoneyLion's guide on whether you should file walks through the warning signs and questions to weigh.

Common Mistakes To Avoid Before Filing

These missteps can delay or derail a case:

• Skipping required credit counseling: Both chapters require a session with an approved agency within 180 days before you file. Filing without it can get your case dismissed.

• Assuming every debt will disappear: Child support, most student loans, recent taxes and some other debts typically survive bankruptcy.

• Missing the 341 meeting: Failing to attend your meeting of creditors can delay or derail your case.

• Waiting too long to explore alternatives: Nonprofit credit counseling, debt consolidation or negotiating directly with creditors may resolve your situation without a filing.

Bankruptcy Alternatives To Consider First

Bankruptcy can be a powerful tool, but it isn't the only option. Depending on your situation, these alternatives may be worth exploring first:

• Nonprofit credit counseling: A certified credit counselor can review your debt, help you build a budget and potentially set up a debt management plan with creditors. The Consumer Financial Protection Bureau (CFPB) offers resources on choosing a counselor.

• Debt consolidation: Combining multiple debts into a single loan may lower your monthly payment and interest rate, depending on your credit profile.

• Negotiating with creditors: Some creditors will agree to a payment arrangement or settle for less than you owe, especially if an account is already delinquent.

• Income-driven repayment plans: For federal student loans, income-driven repayment may reduce your monthly payments without bankruptcy.

None of these options is right for everyone. MoneyLion's comparison of bankruptcy vs. debt relief explains when each approach tends to make more sense, and a nonprofit credit counselor or bankruptcy attorney can help you compare your options.

Bottom Line

Bankruptcy is a federal legal process that gives people with unmanageable debt a way to get relief, by discharging eligible debts through Chapter 7 or restructuring them into a repayment plan through Chapter 13. It offers real protections, including an immediate pause on most collection actions, but it also carries significant, long-lasting credit consequences.

If you're weighing this option, start by understanding which of your debts can be discharged, whether you meet the eligibility requirements and what alternatives are available. Talk with a nonprofit credit counselor or bankruptcy attorney before you file.

FAQ

Here are quick answers to common questions about bankruptcy.

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Chapter 7 eliminates most eligible unsecured debts, like credit cards and medical bills, typically within about four to six months for straightforward cases, but you may have to give up nonexempt assets. Chapter 13 takes three to five years and requires regular income, but it lets you keep your assets while repaying some or all of your debt. It's often a better fit for homeowners who want to stop foreclosure.

Does bankruptcy erase all of your debt?

No. Child support, alimony, most student loans and recent income tax debt are among the obligations that typically survive. If most of what you owe is nondischargeable, bankruptcy may not provide the relief you need, so talking with a credit counselor or bankruptcy attorney first is worth the time.

What happens to your credit when you file for bankruptcy?

Bankruptcy has a significant negative effect on your credit and can stay on your report for seven to 10 years from the filing date. Chapter 7 generally stays the full 10 years, while completed Chapter 13 cases are typically removed after seven. The impact tends to lessen as you build a positive payment history.

Do you have to go to court if you file for bankruptcy?

Most people attend one required meeting, the 341 meeting of creditors, typically held a few weeks after filing. It's usually a brief meeting with the trustee rather than a courtroom hearing, and creditors often don't attend. Contested matters can require additional appearances.

Is bankruptcy the only option if you can't pay your debts?

No. Depending on your situation, nonprofit credit counseling, a debt management plan, debt consolidation or negotiating with creditors may be worth exploring first. If you do file, the required pre-filing course must come from an agency on the U.S. Trustee Program's approved list.

Key Terms

• Bankruptcy: A federal legal process that lets people or businesses with unmanageable debt seek relief under court supervision, governed by the U.S. Bankruptcy Code.

• Chapter 7: Individual bankruptcy that discharges most eligible unsecured debts, typically within about four to six months for straightforward cases. It requires passing an income-based means test.

• Chapter 13: Individual bankruptcy that restructures debt into a court-approved three- to five-year repayment plan, letting filers keep assets while catching up.

• Automatic stay: A court order that takes effect immediately upon filing and halts most collection actions, with some exceptions.

• Bankruptcy trustee: An official who oversees a bankruptcy case, reviewing finances, managing assets and distributing payments to creditors depending on the chapter.

• Means test: An income-based calculation that determines whether a person qualifies to file Chapter 7.

• Discharge: The legal elimination of a debt through bankruptcy, releasing the borrower from the obligation to repay it.

• Nondischargeable debt: Debt that survives bankruptcy, such as child support, alimony, most student loans and recent taxes.

Summary generated by AI, verified by MoneyLion editors.

Sources

• Administrative Office of the U.S. Courts: Bankruptcies Rise 12.2 Percent

• U.S. Courts: Table F-2, Bankruptcy Filings by Chapter (Period Ending June 30, 2026)

• U.S. Courts: Chapter 7 Bankruptcy Basics

• U.S. Courts: Chapter 13 Bankruptcy Basics

• U.S. Courts: Discharge in Bankruptcy

• U.S. Department of Justice, U.S. Trustee Program: Credit Counseling Agencies Approved Pursuant to 11 U.S.C. § 111

• Consumer Financial Protection Bureau: What Is Credit Counseling?

• 11 U.S.C. § 523, Exceptions to Discharge