Bankruptcy Basics: What You Need to Know Before Filing

Key Takeaways Bankruptcy can offer a fresh start, but it comes with long-term consequences and should be carefully considered. There are different types of bankruptcy, and understanding the differences is key to making the right choice. A free session free session with a GreenPath financial counselor can help you explore your options before you commit to filing. Note This article is intended for informational purposes only and does not constitute legal advice. GreenPath Financial Wellness is not a law firm and does not provide legal services. For guidance specific to your situation, please consult a qualified bankruptcy attorney. If you’re feeling overwhelmed by debt and struggling to make ends meet, the idea of bankruptcy might feel like both a last resort and a lifeline. And in some cases, it can offer the financial reset people desperately need. But it’s also a major financial step—one with long-term consequences—so it’s important to fully understand what you’re getting into. What Is Bankruptcy? Bankruptcy is a legal process designed to help individuals or businesses who can’t pay their debts. When you file for bankruptcy, you’re asking the courts to discharge or reorganize your debts under federal protection. Bankruptcy is governed by bankruptcy law and the bankruptcy code, which set out the rules and procedures for the process. Depending on the type of bankruptcy you file, some of your debts may be wiped out entirely, while others may be restructured into a manageable repayment plan. Personal bankruptcy cases are handled in bankruptcy court under federal law, where the court oversees the filing, reviews petitions, and manages the legal proceedings. While bankruptcy is meant to give you a fresh start, it does leave a lasting mark on your credit and can impact your ability to borrow money, rent housing, or even get certain jobs. Understanding the bankruptcy code and the differences between types of personal bankruptcy is important before proceeding. Common Types of Bankruptcy Most personal bankruptcies in the U.S. are Chapter 7 or Chapter 13 bankruptcy cases, and bankruptcy filings under these chapters are a common form of debt relief for those struggling with overwhelming debt. Chapter 7 – Liquidation Also known as “straight bankruptcy,” Chapter 7 allows you to wipe out most unsecured debts, like credit cards, medical bills, and personal loans. In return, you may have to give up some assets—although many people who file Chapter 7 qualify for exemptions that allow them to keep things like their home, car, or essential belongings. Some debts, such as certain taxes, child support, and federal student loans, are considered non dischargeable debts and cannot be eliminated through Chapter 7 bankruptcy. Who it’s for: People with limited income and few assets who can’t realistically pay back their debts. Pros : Fast (typically 3–6 months) Discharges most unsecured debt Cons: Fast (typically 3–6 months) Discharges most unsecured debt While most unsecured debts can be wiped out, some assets, such as personal injury settlements, may be considered exempt property depending on state law. To receive a bankruptcy discharge, you must complete all required steps, including the debtor education course, and the discharge releases you from personal liability for most debts. Chapter 13 – Reorganization Chapter 13 is a court-approved repayment plan. You work with the court to develop a plan (typically 3–5 years) to repay all or part of your debts. The plan involves making a monthly payment based on your regular income, and the court may adjust the interest rate on certain debts. This type of bankruptcy allows you to keep your assets, including your home and car, as long as you stay current on the repayment schedule. Who it’s for: People with regular income who can make consistent monthly payments and can afford to pay back some of their debts over time. Pros : Keep your assets Can stop foreclosure or repossession. Chapter 13 can help you catch