What does bankruptcy actually do?

Bankruptcy is a federal legal process that provides relief from debts that cannot realistically be repaid. Chapter 7, sometimes called liquidation, discharges most unsecured debt including credit cards and medical bills, typically within a few months, in exchange for surrendering non-exempt assets to a trustee. Exemptions vary considerably by state and often protect substantial home equity, a vehicle, retirement accounts, and necessary household goods, which means many filers actually lose nothing. Eligibility requires passing a means test comparing your income to the state median.

Chapter 13 is a reorganization for people with regular income who want to keep assets they would otherwise lose or who do not qualify for Chapter 7. You commit to a court-approved repayment plan lasting three to five years, paying creditors from future income, after which remaining eligible debt is discharged. It is the route that can stop a foreclosure and let you catch up on missed mortgage payments, which is a capability Chapter 7 does not provide.

What bankruptcy does not do matters as much. Student loans are dischargeable only by demonstrating undue hardship in a separate proceeding, a standard that has been difficult though guidance in recent years has made the process somewhat more accessible. Recent tax debts, child support, alimony, most criminal fines, and debts from fraud or willful injury all survive. Secured debts survive as liens on property unless you surrender the collateral. The filing stays on your credit report for seven to ten years depending on chapter, though the practical credit impact often improves faster than people expect since discharged debt stops accruing and the score recovers from a lower base. Credit counseling from an approved agency is required before filing, and given the exemption complexity and the permanence of the decision, this is genuinely a situation for a bankruptcy attorney rather than a form service.