The essentials
Understanding bankruptcy
Bankruptcy is federal law handled in federal bankruptcy courts, so the framework is national. What is not national is which property you get to keep: exemptions depend on state law, and the difference between states can be substantial. That is the single biggest reason generic advice about bankruptcy tends to mislead.
The two individual chapters solve different problems. Chapter 7 is a liquidation: an impartial trustee can sell property that is not exempt and distribute the proceeds to creditors, and eligible individuals receive a discharge of most remaining debts. Chapter 13 is a repayment plan for individuals with regular income, running over a period set by the court, with payments made to a trustee who distributes them. Chapter 13 can also protect a home from foreclosure in ways Chapter 7 generally cannot.
Filing triggers the automatic stay, which the federal courts describe as immediately stopping most collection activity — lawsuits, wage garnishments, and even collection calls. The stay is powerful, but it has exceptions and it can be limited in some circumstances, particularly for repeat filings. Some debts, including domestic support obligations, certain taxes, and criminal restitution, are not discharged at all.
Situations this area may cover
Debt that cannot be repaid on the current path
Balances growing faster than payments, credit used for essentials, or a plan that only works if nothing goes wrong. Recognizing this early expands the available options.
Lawsuits, judgments, and garnishment
A collection suit has its own response deadline, separate from anything else happening. Once a judgment exists, wage garnishment or account levies may follow under state procedure.
Foreclosure or repossession pressure
Secured debts are treated differently from credit card balances. Which chapter helps, and how much, depends on the arrears, the value of the property, and the state's process.
Medical debt after a health event
Large medical balances often arrive alongside lost income. Hospital financial assistance and billing review can matter as much as the debt-relief question itself.
Tax debt and government obligations
Some tax debt can be addressed in bankruptcy and some cannot, and the analysis is technical. Student loans, support obligations, and restitution each have their own rules.
A small business winding down
Personal guarantees, business entity issues, and remaining assets complicate the picture, and the right chapter may differ from what fits a consumer.
General roadmap
What the process may look like
- 01
Credit counseling before filing
The federal courts state that no individual may be a debtor under any chapter without receiving credit counseling from an approved agency within the period before filing that the Bankruptcy Code sets, with narrow exceptions.
- 02
Eligibility analysis
For Chapter 7, a means test compares current monthly income to the state median and, above it, applies a further calculation. Chapter 13 requires regular income and keeps debt within statutory limits. This is where a lawyer's evaluation is most valuable, because the inputs are technical.
- 03
Preparing the petition and schedules
Filing requires a full picture: income, expenses, assets, debts, recent transfers, and prior filings. Accuracy matters — the documents are signed under penalty of perjury.
- 04
Filing and the automatic stay
On filing, the automatic stay generally stops most collection activity, including lawsuits, garnishments, and collection calls. Creditors receive notice of the case.
- 05
The trustee and the meeting of creditors
An impartial trustee administers the case. The debtor attends a meeting and answers questions under oath. In Chapter 7, the trustee reviews whether there is nonexempt property to sell; in Chapter 13, the trustee receives and distributes plan payments.
- 06
Plan confirmation, or asset administration
A Chapter 13 plan must be confirmed by the court and then performed over its term. In Chapter 7, any nonexempt property is administered and proceeds distributed to creditors under statutory priorities.
- 07
Debtor education and discharge
A separate financial management course is required before discharge. The discharge releases the individual from personal liability for most debts and bars creditors from collecting them — but not for debts the law excludes.
Local bankruptcy courts have their own rules and practices, and trustee expectations differ. Confirm requirements for the district where a case would be filed.
Prepare without over-sharing
Documents and information to gather
Income and household finances
Eligibility calculations start from documented income over a defined recent period, not from an estimate.
- Recent pay statements for everyone in the household
- Tax returns and any business income records
- Benefit, pension, or support income statements
- A realistic monthly budget with supporting bills
Debts and creditor actions
Every debt must be listed, including debts owed to family and debts you intend to keep paying.
- Statements for credit cards, loans, and medical accounts
- Collection letters and validation notices
- Lawsuit papers, judgments, and garnishment notices
- Mortgage and vehicle loan statements with arrears amounts
Property and its value
Exemptions depend on state law, and applying them requires knowing what you own and what it is worth.
- Deeds, titles, and current valuations
- Bank, retirement, and investment account statements
- Insurance policies with cash value
- Lists of significant personal property
Recent financial history
Trustees examine transfers, payments, and new debt from the period before filing, so surprises here are worth identifying in advance.
- Records of property transferred or sold recently
- Large payments to family members or a single creditor
- Recent significant purchases or cash advances
- Any prior bankruptcy filing, anywhere
Use your consultation well
Questions to ask an attorney
Based on my income and property, which chapter appears to fit?
Why it matters: The recommendation should follow from the means test, your assets, and your goals — not from a default preference.
Which exemptions apply in my state, and what would I keep?
Why it matters: The federal courts note that exemptions depend on where you live. This is often the deciding factor.
Are any of my debts likely to survive a discharge?
Why it matters: Support obligations, some taxes, and restitution are treated differently, and student loans have their own analysis.
Is there anything in the last few years that a trustee will question?
Why it matters: Transfers, preference payments, and recent borrowing are examined. Raise them before filing, not at the meeting of creditors.
What are the alternatives, and why is filing better here?
Why it matters: Negotiation, hardship programs, or simply waiting are sometimes better. A lawyer who names the alternatives is giving you a real evaluation.
What does your fee include, and how are court and course fees handled?
Why it matters: Filing fees and required courses are separate from attorney fees, and payment timing differs between chapters.
What happens to my house or car if I file?
Why it matters: Secured debts require their own plan. The answer differs sharply between Chapter 7 and Chapter 13.
What will this do to my ability to borrow later?
Why it matters: You deserve a candid answer rather than reassurance, so the tradeoff is made with open eyes.
Understand the agreement
Fees and costs
Flat fee for a consumer case
Most consumer bankruptcy work is quoted as a flat fee for a defined chapter and scope. What is included varies, and disputed matters within a case are often excluded.
Questions worth asking
- Whether the fee covers the meeting of creditors and routine motions
- What is excluded, such as litigation brought by a creditor or trustee
- How and when the fee must be paid relative to filing
Fees paid through a Chapter 13 plan
In Chapter 13, a portion of attorney fees is commonly paid through the plan rather than up front, subject to court approval and local practice.
Questions worth asking
- What must be paid before filing
- How the balance is handled if the case is dismissed
Court fees and required courses
Filing fees are set by the court, and the pre-filing counseling and pre-discharge education courses are provided by approved agencies at their own cost. Fee waivers or installments exist for some filers.
Questions worth asking
- The current filing fee for the chapter under consideration
- Whether a waiver or installment arrangement may be available
Free and low-cost help
Civil legal aid organizations assist qualifying low-income individuals with debt and related matters, and some bankruptcy courts maintain self-help resources.
Questions worth asking
- Whether a local legal aid organization handles consumer debt
- What the court's own self-help resources cover
No fee amounts appear here. Court fees change and attorney fees vary by district and complexity; confirm current amounts with the court and in a written agreement.
Protect your options
Common mistakes and better next steps
Cashing out retirement savings to pay unsecured debt
Get advice first. Retirement accounts often receive protection that the cash you convert them into does not, and the tax consequences can be significant.
Paying one creditor a large amount right before filing
Disclose any recent large payment. Payments to family or a favored creditor may be recoverable by a trustee.
Transferring property to a relative for safekeeping
Do not move assets before getting advice. Transfers before filing are examined closely and can create serious problems.
Leaving a debt off the schedules
List every debt, including ones owed to family or that you intend to keep paying. The filing is signed under penalty of perjury.
Ignoring a collection lawsuit while deciding what to do
The response deadline in a lawsuit runs independently. A default judgment narrows your options even if you later file.
Using new credit while insolvent
Recent borrowing before filing can be challenged as nondischargeable. Stop and get advice before taking on more.
When prompt local help may matter
- A foreclosure sale date or vehicle repossession is scheduled
- Wages are being garnished or a bank account has been frozen
- You have been served with a collection lawsuit and a response deadline is running
- A utility shutoff or eviction is imminent alongside the debt
- You are being pressured to take money from a retirement account or a home's equity to pay unsecured debt
- A debt relief company is asking for upfront payment and telling you to stop communicating with creditors
Timing genuinely matters here. Filing before a scheduled sale can change the outcome, and filing after it usually cannot.
Choices and terminology
Decisions you may face
Chapter 7 or Chapter 13
Chapter 7 is generally faster and does not require years of payments, with the risk that nonexempt property can be sold. Chapter 13 requires sustained payments over the plan term and in exchange can address mortgage arrears and protect property that Chapter 7 would not.
File or negotiate directly
Negotiating with creditors avoids a public court filing and the long-term credit effect, and it depends on creditors agreeing and on your ability to fund a settlement. Filing provides the automatic stay and a court-supervised outcome that does not require anyone's consent.
File now or wait
Waiting can let an anticipated expense or debt be included, or let a problematic transfer age. Waiting also allows judgments, garnishments, and foreclosure to advance. This is a timing question worth asking directly.
Key terms
Automatic stay
The court order effective on filing that stops most collection activity, including lawsuits, garnishments, and collection calls.
Discharge
The order releasing an individual from personal liability for most debts, so creditors may not collect them.
Exemption
A protection that keeps specific property out of the reach of creditors. What is available depends on state law.
Trustee
The impartial person appointed to administer a case, sell nonexempt assets in Chapter 7, or receive and distribute plan payments in Chapter 13.
Means test
The Chapter 7 calculation that compares current monthly income to the state median and, above it, applies a further analysis.
Secured debt
Debt tied to specific property, such as a mortgage or car loan, where the creditor can pursue the property itself.
Nondischargeable debt
Debt that survives bankruptcy, including domestic support obligations, certain taxes, and criminal restitution.
Co-debtor stay
A Chapter 13 protection that can shield someone who is also liable on a consumer debt, such as a co-signer.
Plain-language answers
Frequently asked questions
Will I lose everything if I file?
That is the most common fear and it is usually the wrong picture. Exemptions protect defined categories of property, and the federal courts note that which exemptions apply depends on the state you live in. In many consumer Chapter 7 cases there is no nonexempt property for the trustee to sell at all. Because the answer is so state-dependent, the property question should be worked through with a lawyer before filing rather than guessed at.
Does bankruptcy stop a garnishment or a lawsuit?
Filing triggers the automatic stay, which the federal courts describe as generally stopping collection actions — including lawsuits, wage garnishments, and collection telephone calls. There are exceptions, and the stay can be limited in certain situations such as repeat filings. A garnishment that is already underway is one of the clearest reasons to get advice quickly rather than waiting.
Which debts survive bankruptcy?
A discharge covers most debts but not all. The federal courts identify categories that are not discharged, including alimony and child support, certain taxes, and criminal restitution. Student loans have their own analysis, and debts tied to specific property may require you to keep paying if you want to keep the property. Ask specifically about each significant debt on your list.
Do I have to take a class before filing?
Yes. Federal law requires that an individual receive credit counseling from an approved agency within the period before filing that the Bankruptcy Code specifies, with narrow exceptions, and a separate financial management course is required before discharge. These are short, and approved providers are listed by the court system.
Should I use a debt settlement company instead?
Approach that decision carefully. The Consumer Financial Protection Bureau publishes guidance on debt collection and on responding when a collector sues, and it is worth reading before paying anyone for debt relief. Two patterns deserve particular caution: large upfront payments, and instructions to stop communicating with creditors while a lawsuit deadline is running.
Can I file without a lawyer?
Individuals may file on their own, and some courts provide self-help materials. The Administrative Office of the U.S. Courts states directly that its own bankruptcy materials are not a substitute for the advice of a competent attorney. Chapter choice, exemptions, and recent transfers are exactly the kind of technical questions where a mistake is expensive and often cannot be undone after filing.
Keep learning
Related bankruptcy articles
Important limitation
Lawyer in Town publishes general legal information for consumers. It is not legal advice, it does not create an attorney-client relationship, and it cannot account for the facts of any individual situation. Laws, court procedures, filing deadlines, and outcomes differ by state and by court, and they change over time. Confirm anything that affects a decision with a lawyer licensed in the relevant jurisdiction.
Bankruptcy is federal law applied in federal bankruptcy courts, and this guide follows the federal courts' own published overview. Property exemptions depend on state law, local district rules and trustee practices vary, and collection procedures such as garnishment are governed by state law.