What Filing For Bankruptcy Actually Does To Your Debt
For people who have watched debt pile up to a point that feels impossible to manage, bankruptcy can look like either a lifeline or a last resort depending on how much they understand about what it actually does. The reality is somewhere more nuanced than either of those characterizations. Bankruptcy is a legal process with specific and predictable effects on debt, and understanding what those effects are before filing gives you the most accurate picture of what to expect on the other side.
Our friends at Pioletti Pioletti and Nichols work through this with clients regularly, and what a bankruptcy lawyer will tell you is that the impact of filing on your debt depends entirely on what type of bankruptcy you file, what kinds of debt you carry, and what assets and income you bring to the process.
What The Automatic Stay Does Immediately
The moment a bankruptcy petition is filed, the automatic stay goes into effect. This is one of the most immediate and tangible benefits of filing, and it applies regardless of which type of bankruptcy is pursued.
The automatic stay stops collection activity across the board. Creditor calls stop. Wage garnishments stop. Lawsuits that were pending get paused. Foreclosure proceedings are halted at least temporarily. For people who have been dealing with aggressive collection activity, the relief the automatic stay provides is often felt within hours of filing.
The automatic stay is not permanent in most cases, but it creates breathing room that allows the bankruptcy process to proceed in an orderly way while the court determines the ultimate outcome for each category of debt.
How Chapter 7 Affects Debt
Chapter 7 bankruptcy is the form of relief most people think of when they imagine bankruptcy. It involves the discharge of qualifying unsecured debt, meaning those debts are eliminated entirely and the creditor can no longer pursue collection on them.
Debts that are commonly discharged in Chapter 7 include credit card balances, medical bills, personal loans, and certain older tax obligations that meet specific requirements. What Chapter 7 does not discharge is equally important to understand. Student loans, recent tax debts, child support, alimony, and debts arising from fraud survive a Chapter 7 discharge and remain the filer’s responsibility after the case concludes.
Chapter 7 is available to filers who pass the means test, which evaluates income relative to the state median. Filers who do not qualify for Chapter 7 may still have options under Chapter 13.
How Chapter 13 Affects Debt
Chapter 13 takes a different approach. Rather than discharging debt outright, it reorganizes it into a structured repayment plan that runs three to five years. During that period the filer makes regular payments to a trustee who distributes funds to creditors according to the plan.
At the end of a successfully completed Chapter 13 plan, remaining balances on qualifying unsecured debts are discharged. Chapter 13 also allows filers to catch up on mortgage arrears and keep their home, which makes it a meaningful option for homeowners facing foreclosure who have enough income to sustain a repayment plan.
Common reasons filers choose Chapter 13 over Chapter 7 include:
- Income that exceeds the Chapter 7 means test threshold
- A desire to keep assets that would be liquidated in a Chapter 7 case
- Mortgage arrears that need to be addressed through a structured repayment
- Certain non-dischargeable debts like tax obligations that can be paid through the plan over time
- A prior Chapter 7 discharge within the last eight years that makes filing again under Chapter 7 unavailable
What Bankruptcy Does Not Fix
Understanding the limits of bankruptcy is just as important as understanding what it accomplishes. Secured debts tied to property you want to keep, such as a mortgage or car loan, generally require continued payments regardless of the bankruptcy filing. Non-dischargeable debts follow you through the process. And the impact on your credit score, while manageable and temporary, is real and worth factoring into your decision.
If you are struggling with debt and want an honest assessment of what bankruptcy could do for your specific situation, reaching out to a bankruptcy attorney gives you the clearest picture of your options and what each one actually means for your financial future.