Bankruptcy stops collection calls and wage garnishment, but it damages your credit for years and costs money upfront — so understanding what actually happens before you file matters.
Bankruptcy is a legal process where you tell a court you cannot pay your debts. The court then either erases some debts entirely, or creates a repayment plan you follow for three to five years. Which one happens depends on your income, your assets, and which chapter of bankruptcy law you use. The process is not quick — it takes months from filing to discharge — and it is not free, though the costs are lower than most people expect.
The two most common types for individuals are Chapter 7 and Chapter 13. Chapter 7 wipes out most unsecured debts (credit cards, medical bills, personal loans) but requires you to give up assets above a certain value. Chapter 13 lets you keep your assets but sets up a repayment plan where you pay back a portion of what you owe over time. Which one you can use depends on your income and how much debt you carry.
Key Takeaways
- Filing for bankruptcy stops collection calls and wage garnishment immediately through an automatic stay, but does not erase secured debts like mortgages or car loans unless you give up the property.
- Chapter 7 bankruptcy erases most unsecured debts but requires you to pass a means test based on your income, and you may lose non-exempt assets.
- Chapter 13 bankruptcy creates a three- to five-year repayment plan and lets you keep your property, but you must have regular income and the plan must show creditors will receive a certain percentage of what they are owed.
- Filing costs between $300 and $400 in court fees plus attorney fees (typically $1,000 to $3,000 for Chapter 7, more for Chapter 13), though fee waivers exist for low-income filers.
- Bankruptcy stays on your credit report for seven to ten years and makes borrowing more expensive, but you can rebuild credit during and after the process.
How the Automatic Stay Works and What It Stops
The moment you file for bankruptcy, the court issues an automatic stay — a court order that tells creditors to stop collection activity immediately. This stops phone calls, letters, wage garnishment, and lawsuits. If a creditor violates the stay, you can sue them for damages. This is one of the most concrete benefits of filing, and it happens the same day you submit your petition.
The automatic stay does not stop everything. It does not pause child support or alimony payments, criminal proceedings, or eviction if your landlord has already filed. It also does not erase secured debts — money you borrowed against property, like a mortgage or car loan. If you want to keep the house or car, you have to keep paying. If you do not pay, the lender can still foreclose or repossess, though the stay gives you time to catch up or work out a plan.
The stay lasts through your entire bankruptcy case. Once the court discharges your debts (usually four to six months after filing in Chapter 7, or at the end of your repayment plan in Chapter 13), the stay ends and creditors can resume collection — but by then, the debts they were chasing are legally gone.
Chapter 7: Liquidation and the Means Test
Chapter 7 bankruptcy erases most unsecured debts — credit card balances, medical bills, personal loans, payday loans. You do not have to repay them. But the court can sell your non-exempt assets to pay creditors what it can. Exempt assets vary by state, but typically include your primary home (up to a certain equity), your car (up to a certain value), household goods, and tools of your trade.
Before you can file Chapter 7, you must pass the means test. This compares your income to the median income in your state for a household your size. If your income is below the median, you pass automatically. If it is above, the court looks at your expenses and calculates whether you have money left over each month to pay debts. If you do, the court may deny Chapter 7 and push you toward Chapter 13 instead. The means test is not a judgment about your character — it is a calculation about whether you have the ability to pay.
Chapter 7 moves quickly. You file the petition, attend a brief hearing with a trustee (the court-appointed official who oversees your case), and if there are no complications, the court discharges your debts within four to six months. You do not make monthly payments. The trade-off is that you may lose assets, and your credit takes a significant hit.
Chapter 13: Repayment Plans and Keeping Your Property
Chapter 13 bankruptcy does not erase debts — it reorganizes them. The court approves a repayment plan where you pay back a portion of what you owe over three to five years. You keep your property, including your house and car, as long as you stick to the plan. This makes Chapter 13 the choice for people who have assets they want to protect or who earn too much to may have access to for Chapter 7.
Your Chapter 13 plan must show that creditors will receive at least as much as they would in Chapter 7. If you have a house with equity, you might pay back more of your debts. The plan also prioritizes certain debts: child support and alimony come first, then taxes and secured debts (like your mortgage), then unsecured debts like credit cards. You make one monthly payment to a trustee, who distributes it to your creditors according to the plan.
Chapter 13 takes longer — the full plan runs three to five years — but it gives you breathing room. If you fall behind on your mortgage, Chapter 13 can stop a foreclosure and let you catch up through the plan. If you have a car loan, you can sometimes reduce the interest rate or extend the term. At the end of the plan, remaining unsecured debts are discharged, just like in Chapter 7.
Costs and Fees You Will Encounter
Filing for bankruptcy costs money upfront. Court filing fees are set by federal law and are currently $335 for Chapter 7 and $310 for Chapter 13. You also have to pay for credit counseling (usually $50 to $100) and debtor education (usually $50 to $100), both required by law before and after filing. These are non-negotiable.
Attorney fees vary widely depending on where you live and the complexity of your case. A straightforward Chapter 7 typically costs $1,000 to $3,000 in attorney fees. Chapter 13 usually costs more — $2,500 to $6,000 — because the attorney has to draft and manage a repayment plan. Some attorneys offer payment plans so you can pay fees over time. If you cannot afford an attorney, you can file without one, though this is risky because bankruptcy law is complex.
If you cannot afford the filing fees, you can request a fee waiver or pay in installments. Courts grant waivers to people whose income is below 150 to 200 percent of the federal poverty line, depending on your state. You request the waiver when you file your petition.
What Happens to Your Credit and How to Rebuild
Bankruptcy damages your credit score significantly — typically a drop of 130 to 200 points, depending on your starting score. A Chapter 7 bankruptcy stays on your credit report for ten years from the filing date. A Chapter 13 stays for seven years. During those years, lenders will see the bankruptcy and may deny you for credit, or offer credit at much higher interest rates.
But you can rebuild credit during and after bankruptcy. Many people find their credit score actually starts to recover within a year or two, because bankruptcy stops the damage of ongoing missed payments and collections. Once the bankruptcy is filed, you have a clean slate — no more accounts in default, no more creditors calling. You can open a secured credit card (one backed by a cash deposit), make on-time payments, and gradually improve your score.
Lenders view a bankruptcy that is several years old differently than a recent one. After three to five years, you may be able to get a mortgage or car loan again, though at higher rates than someone with perfect credit. After seven to ten years, when the bankruptcy falls off your report, lenders treat you like anyone else with your current credit score.
Debts That Bankruptcy Cannot Erase
Bankruptcy erases most debts, but not all. Student loans are almost never discharged unless you can prove undue hardship — a legal standard that is difficult to meet. Child support and alimony cannot be erased. Recent taxes (generally the last three years) cannot be erased, though older taxes sometimes can. Fines and penalties imposed by courts stay on the books. Debts incurred through fraud are not discharged.
Secured debts — mortgages and car loans — are not erased either. If you want to keep the property, you have to keep paying. If you do not pay, the lender can foreclose or repossess. In Chapter 13, you can sometimes modify these debts (lower the interest rate or extend the term), but you cannot eliminate them entirely.
The Timeline From Filing to Discharge
Chapter 7 moves fastest. You file your petition and supporting documents. Within 14 days, the court schedules a 341 meeting (the meeting of creditors), which is usually brief — the trustee asks questions about your assets and debts, and creditors rarely show up. If there are no objections, the court discharges your debts 60 days after the meeting, typically four to six months after you file.
Chapter 13 takes longer because the court has to approve your repayment plan. You file your petition and proposed plan. The trustee reviews it and may object if the plan does not meet legal requirements. You attend a confirmation hearing where the judge approves or rejects the plan. Once confirmed, you begin making monthly payments immediately. The plan runs three to five years, and at the end, remaining unsecured debts are discharged.
If complications arise — creditors object, you have significant assets, or your income changes — the timeline stretches. But most straightforward cases follow the timeline above.
Frequently Asked Questions
Will I lose my house if I file for bankruptcy?
Not automatically. In Chapter 7, your primary home is usually protected up to a certain equity amount (the limit varies by state, typically $20,000 to $30,000). If your equity is below that, you keep the house. If it is above, you may have to sell it or pay the trustee the excess. In Chapter 13, you keep your house as long as you make your plan payments and stay current on your mortgage.
Can I file for bankruptcy if I have a job?
Yes. Having a job does not disqualify you. In Chapter 7, your income just has to be below your state's median (or you have to pass the means test). In Chapter 13, you need regular income to make plan payments, so having a job actually helps. Self-employed people can file too, though they need to show consistent income.
What happens if I cannot complete my Chapter 13 plan?
If your circumstances change and you cannot make payments, you can ask the court to modify the plan (lower payments, extend the timeline). If modification is not possible, the court may dismiss the case, and you lose the protection of the automatic stay. Some debts may be discharged anyway if you have paid a certain percentage, but this depends on your specific situation.
Can I file for bankruptcy more than once?
Yes, but there are waiting periods. You must wait eight years between Chapter 7 filings, four years between Chapter 13 filings, and two years if you file Chapter 13 after Chapter 7. These waiting periods are measured from the date of discharge, not the filing date.
Do I have to tell my employer I filed for bankruptcy?
No. Bankruptcy is private, and employers cannot legally fire you because you filed. However, if your employer is also a creditor (you owe them money), they will find out through the bankruptcy process. Wage garnishment stops once you file, so your employer will see that change in your paycheck.