Page last updated: 04/24/2023
Bankruptcy is a request to a court to provide relief when you are unable to pay your debts. It may offer you a fresh start if you can no longer afford to pay your bills. For example, you may be having trouble making payments for all or some of the following:
When you get too far behind on payments, such as on loans you received to buy a home or car, a creditor may be able to take them back. For any type of unpaid bill, whether it’s an installment payment for a loan or a monthly bill for utilities, debt collectors may contact you often to ask for the money you owe. Ultimately, these debt collectors could sue you in court for payment. The court could order you to pay back the money you owe in different ways. This includes taking it from your paycheck.
Bankruptcy is a way to avoid having some of these things happen.
Most people who file for bankruptcy as an individual choose one of two types: Chapter 7 bankruptcy or Chapter 13 bankruptcy.
You may be able to get free legal services for either a Chapter 7 bankruptcy or Chapter 13 bankruptcy filing. Find out if you qualify for these services by contacting your state or territory’s LSC-supported legal aid office.
In a Chapter 7 bankruptcy, you’re asking the court to discharge some of the debts owed before you filed for bankruptcy. “Discharging” a debt means no one can try to collect the money from you. This discharge can apply to debts like credit card balances, medical bills, and utility bills.
For example, Chapter 7 bankruptcy could also get rid of the requirement to pay your landlord for rent payments that you missed. However, your landlord would still be allowed to evict you from your home for not paying the rent. If you own your home, you might not have to pay back any mortgage payments you missed, but your mortgage lender could still take back your home.
For certain items, no type of bankruptcy can get rid of your responsibility to pay what you owe. For example, you usually still have to pay what you owe for taxes, alimony, or child support.
Student loans are difficult to discharge in Chapter 7 bankruptcy, but some people are able to do it. To ask for a student loan discharge, you must file a separate request with the court called an “adversary proceeding.” In this proceeding, you are asking the court to agree that repayment of the loan would “impose undue hardship” on you and your dependents (such as a child).
To decide whether paying the student loan debt would impose undue hardship, the court might consider:
The U.S. Department of Education provides more details on this adversary proceeding process and how it could change payments on your student loan.
Chapter 13 bankruptcy is sometimes referred to as debt restructuring because after this type of bankruptcy, you’ll still have debts. “Debt restructuring” means you’ll have a new plan that lets you make smaller payments over a longer time period to pay back what you owe. Also, Chapter 13 bankruptcy could reduce the amount you owe.
A debt restructuring plan can be particularly helpful for keeping your home, vehicles, and other items you purchased with loans. For example, homeowners may file for Chapter 13 bankruptcy to catch up on mortgage payments over a five-year period.
Student loans are very rarely discharged in Chapter 13 bankruptcy, but the loan payments are often delayed or reduced. Talk to an attorney about how your student loan payments could be changed in a Chapter 13 case.
Bankruptcy provides some benefits. Here are some of the biggest ones:
Bankruptcy should not be taken lightly. Here are some of the ways filing for bankruptcy can harm you:
There are many things to consider before filing for bankruptcy. Here are some of them:
It’s a good idea to talk with an attorney or other expert adviser if you are considering filing for bankruptcy. You may be able to get free legal advice. Find out if you qualify for this free advice by contacting your state or territory’s LSC-supported legal aid office.
You must take a credit counseling course no more than 180 days before filing a bankruptcy case. The U.S. Justice Department provides a list of approved credit counseling agencies. The reason you must take this course is to ensure you have considered other options before declaring bankruptcy.
When you’re ready to file your case, you must file it at your local federal bankruptcy court. Use the Federal Court Finder tool to locate yours.
If you’re filing for Chapter 7 bankruptcy, Upsolve is a free resource that you can use to prepare and file your bankruptcy documents. Upsolve is a nonprofit partially funded by the Legal Services Corporation (LSC).
You’ll need to include many documents when you file your case. Here are some of the documents you must provide:
The fees you must pay to file either a Chapter 7 or Chapter 13 bankruptcy case amount to more than $300. These fees could change, so check with the court where you plan to file.
You may be able to pay your filing fee a little at a time instead of all at once. In some Chapter 7 bankruptcy filings, you can ask the court to cancel the fee.
Bankruptcy cases are complicated, so you will likely need an attorney to help you. You may be able to avoid attorneys’ fees by finding an organization that provides free legal services for low-income residents, such as your state or territory’s legal aid office. If you have to pay attorneys’ fees, the cost could be thousands of dollars.
A Chapter 7 bankruptcy case is usually quick, finishing about 60 days after the first court hearing. It ends after you receive a discharge notice in the mail.
A Chapter 13 bankruptcy case remains open until you complete your payments under the plan. The plan can last for up to five years.