Bankruptcy is governed by federal statute (Title 11 of the U.S. Code) and administered by U.S. Bankruptcy Courts. For individuals, two chapters dominate filings: Chapter 7 (liquidation) and Chapter 13 (reorganization).

Chapter 7 — Liquidation

A trustee is appointed to gather any non-exempt assets, liquidate them, and distribute proceeds to creditors. Most filers, however, have no non-exempt assets — these are called "no-asset" cases. Remaining unsecured debt is discharged. Start to finish: typically 3–6 months.

Eligibility — the means test

Compare your average monthly income over the prior six months against your state's median for a household of your size. If you're below the median, you qualify automatically. If above, a more detailed calculation of disposable income determines eligibility — and many higher earners still qualify after allowable expenses.

Chapter 13 — Reorganization

You propose a 3–5 year repayment plan that uses your disposable income to pay some or all of your debts. At the end of the plan, remaining eligible unsecured debt is discharged. Chapter 13 is the right tool when you have non-exempt assets you want to keep (notably a home with equity and a mortgage in arrears) or income too high for Chapter 7.

What gets discharged

• Credit card debt
• Medical bills
• Personal loans
• Most older income tax debt (with conditions)
• Deficiency balances on repossessed property
• Most civil judgments

What survives discharge

• Federal student loans (absent an "undue hardship" finding — historically rare, easier since 2022)
• Most tax debts under three years old
• Child support and alimony
• Debts incurred via fraud
• Court-ordered restitution and most government fines
• Secured debt, unless you surrender the collateral

Costs

• Chapter 7 filing fee: $338 (waivable for low-income filers).
• Chapter 13 filing fee: $313.
• Attorney fees: $1,000–$2,500 for Chapter 7; $3,500–$6,000 for Chapter 13 (often paid through the plan).
• Required courses: Pre-filing credit counseling and post-filing debtor education, ~$50 total.

Credit aftermath

Chapter 7 remains on your credit report for 10 years from filing; Chapter 13 for 7 years. The scoring impact is severe at filing but unlike a settlement program, the recovery is faster — most filers can qualify for a secured credit card immediately, a car loan within 1–2 years, and an FHA mortgage 2 years after Chapter 7 discharge (1 year into a Chapter 13 plan with court permission).

When to consider it seriously

• You can't pay back the debt within 5 years under any realistic plan.
• You're being sued or facing wage garnishment.
• Settlement won't work because too much of the debt is unsettleable (student loans, taxes) or you have garnishable wages.
• Your retirement savings are at risk of being depleted to pay creditors who couldn't reach them in bankruptcy anyway.