There is a point where payoff strategy stops applying. The minimum payments cost more than what is left after rent and food, and no realistic raise closes the gap. Bankruptcy is what the law does at that point. Here is how the two consumer versions work, and what each one leaves untouched.
What Filing Actually Is
Bankruptcy is a court case. You file a petition in the federal bankruptcy court for your district, with schedules listing every debt, every asset, your income, and where your money goes each month. A trustee reviews it, creditors get notice and a chance to object, and about a month in you answer the trustee's questions under oath at the meeting of creditors (the 341 meeting).
If the case works, a judge signs a discharge order. The debt becomes unenforceable, so the creditor cannot sue you over it, garnish your wages for it, or contact you about it again.
What the Automatic Stay Stops the Day You File
Filing triggers the automatic stay, and automatic is literal: no hearing, no signature, no waiting. Once the petition is on the docket, collection has to stop. Lawsuits pause, wage garnishment stops, and a foreclosure sale set for next week does not happen. Repossessions, bank levies and collection calls stop too, and a creditor who keeps going can be sanctioned.
Some things go on anyway. Criminal cases continue. Child support and alimony can still be collected from property outside the bankruptcy estate, and support already withheld from your paycheck keeps being withheld. A tax audit continues, though tax collection cannot. A secured creditor you have stopped paying can also ask the court to lift the stay, so it is a pause rather than an outcome. If you filed another case in the past year, it expires after 30 days unless the court extends it.
Chapter 7 Is Liquidation, and Usually Nothing Gets Liquidated
In Chapter 7 the trustee takes property that is not exempt, sells it, and pays unsecured creditors from the proceeds. The qualifying debt left over is discharged. In most consumer cases there is nothing to sell, because everything the filer owns is exempt. Discharge usually comes 60 to 90 days after the first scheduled creditors' meeting, so the case often runs three to four months.
Secured debt is the part people get wrong. Discharge erases your personal promise to pay, but the lien on your house or car survives it. Keep the car by keeping up the payments, sometimes under a reaffirmation agreement that puts you back on the hook for that debt. Surrender it instead and the shortfall is discharged.
Chapter 13 Is a Repayment Plan a Judge Approves
Chapter 13 keeps your property and pays creditors out of future income. You propose a plan, a judge confirms it, and you pay a trustee monthly. The length comes from your income against the median for your household size in your state: three years below it, five at or above, and five is the ceiling.
People choose Chapter 13 for things Chapter 7 cannot do. Mortgage arrears can be cured over the plan instead of in a lump sum, which is how a filer keeps a house they have fallen behind on. A co-debtor stay shields anyone who cosigned a consumer debt with you.
The cost is years on a court-supervised budget, and missed payments can get the case dismissed with no discharge at all.
The Means Test Is the Gate Between Them
The means test decides whether Chapter 7 is open to you, in two steps.
Step one is current monthly income, a defined term rather than your paycheck. Average your gross income from nearly all sources over the six full calendar months before filing, annualize it, and compare it to the median for your household size in your state. Below the median, no presumption of abuse arises.
Above it, step two subtracts allowed living expenses, many set by IRS collection standards rather than by what you actually spend, plus secured and priority debt payments. What remains is projected over 60 months and measured against thresholds in the Code. Clear them and the law presumes your filing is an abuse, rebuttable only by special circumstances, and otherwise the case converts to Chapter 13 or gets dismissed.
Both the medians and the thresholds are adjusted on a schedule, so a figure you find online may already be stale. The six-month lookback is the trap: a recent job loss may not show up yet.
Exemptions Decide What You Actually Keep
An exemption is property creditors cannot reach: equity in a home, equity in a vehicle, household goods and clothing, tools you need for work, and retirement savings.
State law sets exemptions, and they vary more than anything else here. A homestead exemption is effectively unlimited in a few states and a modest fixed sum in others. The Bankruptcy Code carries its own federal set, but you may use it only if your state permits the choice, and most states have opted out. Which state's rules apply turns on domicile: if you have not lived in your current state for the two years before filing, the law sends you back to where you lived for most of the six months before that.
Retirement accounts get the strongest protection: employer plans generally in full, IRAs up to a periodically adjusted cap.
Which Debts Survive the Discharge
A discharge is broad, and these still come through it intact:
Child support and alimony, in either chapter, without exception.
Recent income taxes. Older ones can be discharged only if the return was due more than three years ago counting extensions, was filed more than two years ago, and the tax was assessed more than 240 days ago. Unfiled and fraudulent returns never qualify.
Debts from fraud or embezzlement, and large purchases or cash advances taken right before filing.
Criminal fines and restitution.
Injuries you caused while driving drunk.
Most student loans.
Student Loans, and the Part That Has Recently Moved
The Code does not make student loans impossible to discharge. They survive unless keeping them would impose an "undue hardship" on you and your dependents, and proving it means filing an adversary proceeding, a separate lawsuit inside your bankruptcy against the loan holder, and winning it.
"Undue hardship" is undefined in the statute. Most circuits use a three-part standard from a 1987 case called Brunner: you cannot maintain a minimal standard of living while repaying, that will likely persist for much of the repayment period, and you tried in good faith to repay. Courts applied it strictly for decades.
In November 2022 the Justice and Education Departments issued guidance for government lawyers handling these cases. The borrower files an attestation form setting income against expenses measured by IRS standards. Where the three elements are met, attorneys are directed to agree to the hardship facts and recommend discharge rather than fight, and the guidance presumes hardship persists for borrowers who are 65 or older, disabled, or who never finished the degree the loans paid for.
Read the limits. This is internal policy rather than a change to the statute, it has been revised since, and it reaches federal loans held by the Education Department, leaving private loans and some older federal loans outside. The lawsuit is still required and the judge still decides.
The Two Required Courses, and What Comes After
Two courses are required, both from providers approved by the US Trustee Program. Credit counseling has to be done within 180 days before you file, or you generally cannot be a debtor. A debtor education course comes after filing and before discharge, and skipping it lets the court close your case with no discharge.
Federal law lets a bankruptcy be reported for 10 years from the filing date. The bureaus voluntarily drop a completed Chapter 13 after seven, since some debt was repaid, and the individual accounts fall off on their own seven-year clocks.
Scores usually start recovering before the entry disappears, because new delinquencies stop appearing. Rebuilding is ordinary: a secured card paid in full monthly, a clean record on what survived, and time.
Filing is a proceeding with deadlines, sworn schedules and an opposing side, so representation changes outcomes. Take a lawyer these questions:
Which chapter do my income and my property point to?
Which state's exemptions apply, and what of mine falls outside them?
What happens to my house and my car?
Is any of my tax debt old enough to discharge?
Would filing a few months from now change the means test result?
Are my student loans the kind the attestation process covers?
