Bankruptcy is a federal court process that legally cancels or restructures debt. For people facing collection lawsuits, wage garnishment, or foreclosure, it is the strongest debt relief the legal system offers. The two main consumer chapters, Chapter 7 and Chapter 13, do very different things, and the means test under the Bankruptcy Abuse Prevention and Consumer Protection Act decides which one you can use.
What a bankruptcy filing actually changes
The moment a bankruptcy petition is filed, the automatic stay under 11 U.S.C. section 362 takes effect. The stay stops almost every collection activity instantly. Wage garnishment stops. Collection lawsuits pause. Foreclosure sales scheduled for the next day cannot proceed. Phone calls and letters from collectors have to stop or the creditor risks contempt sanctions.
The stay buys time. The chapter you file under decides what happens during that time and what debt obligations you walk out with at the end.
Chapter 7: liquidation
Chapter 7 is the faster of the two, typically completing in three to four months from filing to discharge. The trustee assigned to your case reviews your assets and liabilities. Most filers have no non exempt assets, which means the trustee sells nothing and the case proceeds as a no asset case. Unsecured debt, including credit cards, medical bills, personal loans, and old utility bills, is discharged at the end.
Chapter 7 does not eliminate secured debt obligations. If you want to keep a financed car or a mortgaged house, you have to keep making the payments and you usually sign a reaffirmation agreement or continue paying under a ride through arrangement. If you do not want to keep the asset, you surrender it and the lender takes it back without further obligation to you.
Filing Chapter 7 requires court fees of about 338 dollars, although fee waivers are available for low income filers. Most cases also involve attorney fees, which average 1,200 to 2,000 dollars depending on the district, although some debtors file pro se.
Chapter 13: reorganization
Chapter 13 is a three to five year repayment plan. You propose a plan to pay creditors a portion of what you owe based on your disposable income, and the court confirms the plan if it meets statutory requirements. At the end of the plan period, any remaining unsecured debt is discharged.
Chapter 13 is the path for filers who want to catch up on a mortgage in arrears, save a home from foreclosure, keep a car they could not exempt in Chapter 7, or who do not qualify for Chapter 7 because their income is too high. The plan can also strip wholly unsecured second mortgages on underwater homes and reduce some secured debt to the value of the collateral, a process called cramdown.
Chapter 13 requires you to keep making payments throughout the plan period. If you miss payments, the case can be dismissed and you lose the protections, although in some cases conversion to Chapter 7 is possible.
The means test
The means test, codified at 11 U.S.C. section 707(b), determines whether you can file Chapter 7. The test has two parts.
Part one compares your household income for the six months before filing to the median income for your household size in your state. If you are below the state median, you pass automatically and can file Chapter 7. The state medians are published by the U.S. Trustee Program and updated periodically.
Part two applies if you are above the median. You calculate disposable income by subtracting allowable expenses, defined largely by IRS national and local standards, from your income. If your disposable income over five years is below specific thresholds, you can still file Chapter 7. If it exceeds the thresholds, the court presumes abuse and you are usually limited to Chapter 13.
The means test is heavily formula driven. Small differences in income, household size, and allowable expenses can change the outcome.
Required credit counseling and debtor education
Federal law requires every individual filer to complete two short courses. Credit counseling has to be completed within 180 days before filing. Debtor education has to be completed after filing but before discharge. Both courses are taken from approved providers listed on the U.S. Trustee Program website and typically cost 10 to 50 dollars each, with fee waivers available.
Missing either course blocks the discharge. Some filers complete both courses before filing to avoid forgetting.
What discharge does not cover
The discharge eliminates most unsecured consumer debt, but several categories survive even a successful bankruptcy.
Domestic support obligations, including child support and alimony, are never discharged. Most student loans are not discharged unless the debtor can prove undue hardship in a separate adversary proceeding, a high bar that is becoming somewhat more accessible after recent Department of Justice and Department of Education guidance. Recent tax debts, generally taxes assessed within the last three years, are not discharged. Debts incurred by fraud, intentional injury, or embezzlement are not discharged if a creditor objects and proves the basis.
Criminal fines and restitution are not discharged. Debts secured by a lien on property are not discharged in the sense that the lien survives, although personal liability on the underlying debt can be discharged.
The practical effect is that bankruptcy is best at eliminating credit card debt, medical debt, old utility bills, deficiency balances on repossessed cars, and most personal loans. It does less for tax debt, student loans, and domestic support obligations.
Common misreads we see filers make
Misread one: assuming bankruptcy will erase student loans. Standard discharge does not touch federal student loans. You need a separate adversary proceeding and an undue hardship showing. Plan accordingly.
Misread two: thinking transferring assets before filing protects them. Transfers within two years can be unwound by the trustee as fraudulent transfers, and intentional concealment is a federal crime under 18 U.S.C. section 152. Disclose everything truthfully on the schedules.
Misread three: believing your credit is destroyed forever. A Chapter 7 stays on credit reports for ten years, and a Chapter 13 for seven. Many filers qualify for new credit, including mortgages, within two to four years after discharge by rebuilding through secured cards and on time payments.
Practical next steps
Step one: pull all the documents before deciding. A bankruptcy decision is informed by the last six months of pay stubs, tax returns from the last two years, a complete list of debts including collection accounts, and a list of assets. Without these, even an attorney cannot give a real answer on which chapter fits.
Step two: run the means test calculation early. The U.S. Trustee Program publishes the median income figures and forms. Running the numbers tells you whether Chapter 7 is even on the table or whether Chapter 13 is the only option.
Step three: consult a bankruptcy attorney before filing. Bankruptcy mistakes can mean lost property, denied discharge, or dismissal with prejudice. Most bankruptcy attorneys offer free initial consultations, and the cost of representation is usually less than what one preventable error would cost.
How LawSensai supports bankruptcy filings
LawSensai helps people understand bankruptcy procedures by explaining the chapters, walking through the means test inputs in plain language, and organizing the documents needed to file. For relief options, document organization, and walkthroughs of the filing process, the record clearing surface is the relief workflow in this app. We do not replace a bankruptcy attorney, and for any actual filing decision a consultation with licensed counsel is essential because the consequences of mistakes are lasting.
This article is informational and not legal advice. Bankruptcy law involves significant local variation between districts, and individual facts including assets, income, and debt types change the analysis. Consult a licensed bankruptcy attorney for advice on your specific situation.
Authoritative sources
- U.S. Courts: Bankruptcy Basics
- U.S. Department of Justice: U.S. Trustee Program
- Consumer Financial Protection Bureau: Bankruptcy
- IRS: Declaring Bankruptcy
- USA.gov: Filing for Bankruptcy
Last verified: 2026-04-09.