Bankruptcy Explained: What Happens to Your Debt, Home, Car, and Savings?

Bankruptcy is a legal process in federal court that can wipe out many debts or give you a few years to repay them under court protection. Many people who file keep their home, car and retirement savings, because the law protects a set amount of what you own. It doesn't erase every debt, and it stays on your credit report for 7 to 10 years.

1. What is bankruptcy?

Bankruptcy is a legal way to get relief from debt you can't pay, and it goes through a federal court. No, it doesn't mean you lose everything you own.

A few words you'll hear:

Debtor: the person who owes money, which is you if you file.
Creditors: the people or companies you owe.
Discharge: the court's order that wipes out debts. Once a debt is discharged, you don't have to pay it anymore.

Bankruptcy doesn't erase every debt. Child support, most student loans and some taxes usually stay. And if you have a car loan or a mortgage, you still have to keep paying it if you want to keep the car or the house.

Here's why the details matter. Jamal and Erin each owe $40,000. Jamal's debt is all credit cards, so bankruptcy could wipe out almost all of it. Erin's debt is mostly student loans and a car loan, so bankruptcy would help her much less. Same amount owed, very different results.

Bankruptcy isn't a moral failure. Lots of good people use it after a job loss, illness or divorce, and it's a tool the law gives you on purpose.

2. Chapter 7 versus Chapter 13

Most people who file use one of two types, named for their chapter in the federal bankruptcy law. Here's Chapter 7 versus Chapter 13 side by side.

Question	Chapter 7	Chapter 13
How it works	Most debts are wiped out in a few months	You repay part of your debts through a 3- to 5-year plan, then the rest are wiped out
Who can use it	People who pass the means test (an income check)	People with steady income and debts under the limits
Debt limits	None	Under $526,700 unsecured and $1,580,125 secured (since April 1, 2025)
Your property	The trustee can sell things that aren't protected; most filers have nothing sold	You keep your property if you keep up with the plan
How long it takes	Usually about 3 to 4 months	3 to 5 years
Court filing fee	$338	$313
Time on credit report	Up to 10 years from filing	Usually 7 years

A trustee is a person the court appoints to run your case. In Chapter 7, the trustee looks for things to sell. In Chapter 13, the trustee collects your monthly payment and pays your creditors.

Liquidation means selling property to pay creditors, which is why Chapter 7 is sometimes called "liquidation." But most Chapter 7 filers have nothing sold, because everything they own is protected.

Chapter 13 plan length: the state median income is the middle income for a household your size in your state. If your income is below it, your plan usually lasts 3 years, though a court can approve up to 5. If your income is above it, the plan lasts 5 years.

People often pick Chapter 13 to save a home from foreclosure, because it lets you catch up on missed mortgage payments over the plan.

3. What is the means test?

The means test is an income check that decides whether you can use Chapter 7. Here's the first step:

Add up your household's income over the last 6 full months.
Divide by 6 to get your monthly average, then multiply by 12.
Compare that to the median income for a household your size in your state.

If you're below the median, you pass. If you're above it, a longer form subtracts allowed living costs to see how much you could repay. If enough is left over, you'd likely need Chapter 13 instead.

The U.S. Trustee Program, part of the Department of Justice, publishes the median figures and updates them from time to time. Check its means-testing page for the figures that apply on the day you file. The means test is the first step, not the last word, and a lawyer can tell you where you stand.

4. Step by step: what happens when you file

Take a credit counseling course. You must take an approved course within the 180 days before you file. Keep the certificate, because it gets filed with your papers.
File your petition and schedules. The petition is the form that starts your case. The schedules are the forms where you list everything you own and owe, plus your income and costs. List everything. Leaving out an account or asset can get your case thrown out.
The automatic stay starts. The automatic stay is a court order that pauses most collection the moment you file. It stops collection calls, lawsuits, wage garnishment and most foreclosures. The stay is a pause, not a forever stop. A few things, like collecting child support, can keep going.
Go to the meeting of creditors. In Chapter 7, this meeting happens 21 to 40 days after you file. It's often called the "341 meeting." The trustee asks you questions under oath. Creditors can come, but they rarely do.
Take a debtor education class. This is a second required class, on budgeting, that you take after filing. You must finish it before your debts can be discharged.
Get your discharge. In Chapter 7, it usually comes 60 to 90 days after the first meeting date. In Chapter 13, it comes after you finish all your plan payments.

A case can also be dismissed. That means it ends without your debts being wiped out. It can happen if you skip a step, miss plan payments or leave something off your forms.

You can't get a new Chapter 7 discharge within 8 years of filing a case that ended in a Chapter 7 discharge.

5. What happens to the things you own?

When you file, everything you own becomes part of your bankruptcy estate. The trustee looks it over, and anything protected by an exemption stays yours.

An exemption is a law that protects a type of property, or a set dollar amount of it, from creditors. Most people's things are fully covered. Equity is what something is worth minus what you still owe on it. Exemptions protect equity.

Which list of exemptions you use depends on where you live. Most states have their own list. Some let you choose the federal list instead. If you moved in the last two years, a special rule decides which state's list you use.

Here are a few federal amounts, for cases filed since April 1, 2025:

Property	Federal exemption
Home equity	$31,575
Car equity	$5,025

Retirement savings are well protected. Money in a 401(k) or other employer plan is normally protected in full. IRAs are protected up to a cap of more than $1 million, which most people never reach.

Tax refunds count as property. If you file early in the year, the refund you get later may be part of your estate, unless an exemption covers it. Ask your lawyer about timing.

Wages you earn after filing a Chapter 7 case are yours to keep. In Chapter 13, part of your income goes to your plan payment.

A car example

Meet Tasha and Ben. Each has a car worth $14,000. Tasha owes $11,000 on hers, so her equity is $3,000. Ben owns his car outright, so his equity is $14,000.

Tasha's $3,000 is under the federal car exemption of $5,025. Her car is safe as long as she keeps up the loan payments. Ben's $14,000 is well over the car exemption. Unless other exemptions cover the rest, the trustee could sell his car. Ben would get the protected amount in cash, and the rest would go to creditors. In Chapter 13, Ben could keep the car by paying his creditors at least that extra equity through his plan.

Keeping a car with a loan

A secured debt is a loan tied to property, like a car loan or mortgage. The lender's legal claim on that property is called a lien. Bankruptcy can wipe out what you owe on a car loan. But the lien stays, so if you want to keep the car, you still have to keep paying for it.

You have three main choices for a car with a loan:

Reaffirm. You sign an agreement to keep paying the loan as if you never filed. You keep the car, but you owe the full loan again, even after bankruptcy.
Surrender. You give the car back. Whatever you still owed is wiped out with your other debts.
Redeem. You pay the lender what the car is worth today, in one lump sum, and keep it.

6. Which debts can bankruptcy erase?

Type of debt	What usually happens
Credit cards, medical bills, personal loans	Usually wiped out
Car loan or mortgage	What you owe can be wiped out, but you keep the property only if you keep paying
Child support and alimony	Not wiped out
Recent income taxes	Usually not wiped out; some older income taxes can be
Student loans	Only wiped out if you prove "undue hardship" in a separate case
Debts from fraud, or from injuring someone while driving drunk	Not wiped out
Loans someone cosigned with you	Wiped out for you, but your cosigner (the person who signed with you) still owes

Student loans need extra steps. You must file an adversary proceeding, which is a mini-lawsuit inside your bankruptcy. Since late 2022, the government has used a simpler process to decide whether to agree that a federal student loan should be wiped out. The U.S. Trustee Program's student loan guidance explains how it works.

Don't move property to family, pay back relatives first, or run up new debt before filing. The trustee checks recent transactions and can undo them, and some can get your case denied.

7. How much does it cost?

The court filing fee is $338 for Chapter 7 and $313 for Chapter 13.

Can't pay all at once? You can ask to pay the fee in up to four parts. The last one is due within 120 days of filing.
Very low income? If your household income is below 150% of the federal poverty line and you can't pay in installments, you can ask the court to waive the Chapter 7 fee.

The two required classes cost extra. Approved providers set their own prices, and many lower or waive the fee if your income is low.

Lawyer's fees are usually the biggest cost. Many bankruptcy lawyers offer a free first meeting. Ask for the full fee in writing before you hire anyone.

Example: Rosa files Chapter 7. She pays the $338 court fee, the fees for her two classes, and her lawyer. Her lawyer's fee is far more than the court fee, so she gets it in writing first.

Free help: legal aid offices and some law school clinics help people with low incomes file for free. Our guide to free and nonprofit debt help shows where to look.

8. What happens to your credit?

A Chapter 7 can stay on your credit report for up to 10 years from the filing date. A Chapter 13 usually comes off after 7 years.

Your score will drop, and borrowing will cost more for a while. If you were already behind on payments, your score had probably fallen already. Steady on-time payments after your case help it climb back.

To rebuild:

Pay every remaining bill on time.
Check your credit reports for free and fix mistakes. Each debt that was wiped out should show a $0 balance.
Use a small credit card, or a secured card backed by your own deposit, and pay it in full.
Build a small cash cushion with our emergency fund guide.

Be wary of ads that promise to fix your credit fast for a fee.

9. Try these options first

Bankruptcy isn't the only path. Look at these first if your payments are still within reach:

A payment plan or hardship program from your creditor.
Free nonprofit credit counseling.
A debt management plan, which lowers your rates but has you repay in full.
A carefully chosen consolidation loan.

Our guide on how to pay off debt walks through these.

Move fast if you face a lawsuit, wage garnishment, foreclosure or repossession. Wage garnishment is when a court lets a creditor take money straight from your paycheck. Repossession is when a lender takes back a car. Talk to a bankruptcy lawyer or legal aid right away, because filing can stop these.

10. If you live in New York

New York lets you choose either the New York exemption list or the federal list. A lawyer can tell you which one protects more of what you own.

The New York homestead exemption protects equity in your home. The amount depends on your county. These amounts have applied since April 1, 2024, and will next change on April 1, 2027:

Counties	Home equity protected
Bronx, Kings, Nassau, New York, Putnam, Queens, Richmond, Rockland, Suffolk, Westchester	$204,825
Albany, Columbia, Dutchess, Orange, Saratoga, Ulster	$170,700
All other counties	$102,400

New York also protects a set amount of car equity, household goods and some cash. The New York State Department of Financial Services posts the current amounts.

Bankruptcy cases in New York are heard in one of four federal bankruptcy courts: Northern, Southern, Eastern and Western Districts. Albany is in the Northern District. Each court's website explains local steps.

Common mistakes

Thinking bankruptcy erases everything. Child support, most student loans and recent taxes usually stay.
Thinking you'll lose everything. Most filers keep their things.
Stopping car or mortgage payments. The lien survives; keep paying if you want to keep it.
Leaving something off your forms. Hiding an account can get your case dismissed.
Using another state's exemption amounts. Check the list that applies to you.
Ignoring a lawsuit or foreclosure notice while you decide. Deadlines keep running.
Draining your 401(k) to pay cards. That money is usually protected in bankruptcy.

Frequently asked questions

Will I lose my house?

Usually not, if your equity is under your exemption and you keep paying the mortgage. If you're behind, Chapter 13 can let you catch up over the plan.

Will I lose my car?

Usually not, if your equity is under the exemption and you keep up the loan. Look again at Tasha and Ben in section 5.

Can bankruptcy stop collection calls?

Yes. The automatic stay stops most collection calls and lawsuits the day you file.

Is bankruptcy only for people with no income?

No. Chapter 13 is built for people with steady income who need time to catch up.

Do I need a lawyer?

You can file on your own, but it's easy to make costly mistakes. Talk to a bankruptcy lawyer or legal aid before you file. Many offer a free first meeting.

The bottom line

Bankruptcy isn't a magic reset button, and it doesn't take everything you own. It can wipe out credit card and medical debt, stop collection fast, and give you a fresh start. Learn the basics here, then talk with a bankruptcy lawyer or legal aid office about your own debts and property.

Official sources and further reading

This guide is general education for U.S. readers, not legal advice. Dollar amounts are current as of November 2026; talk to a bankruptcy lawyer or legal aid before you file.

Read our full educational disclaimer.