RESEARCH STARTER

Personal Bankruptcy

Personal bankruptcy is a legal process that allows individuals facing significant financial difficulties to officially declare their inability to repay debts. Upon filing for bankruptcy, individuals may either liquidate their assets to repay creditors or enter a structured payment plan over several years, ultimately leading to a discharge of eligible debts. In the United States, the two primary forms of personal bankruptcy are Chapter 7 and Chapter 13, each tailored to different financial situations and subject to specific eligibility criteria. The bankruptcy process is overseen by federal regulations, requiring individuals to complete credit counseling and adhere to strict procedural requirements.

While bankruptcy can provide a pathway to financial relief, it carries substantial long-term consequences, including a severe impact on credit scores and the possibility of remaining responsible for certain types of debts, such as child support, taxes, and most student loans. Filing for bankruptcy incurs various costs, including legal fees and mandatory counseling expenses, which can add up significantly. Many individuals attempt to avoid bankruptcy by exploring alternatives such as debt consolidation, negotiating with creditors, or seeking assistance from credit counseling services. Overall, personal bankruptcy is considered a last resort for those trapped in unmanageable debt and should be approached with careful consideration and informed guidance.

Full Article

Personal bankruptcy is a process in which an individual with significant financial debts officially declares they are unable to pay those debts. After filing with a bankruptcy court and either liquidating assets to pay creditors or completing a payment plan over several years, the individual receives a discharge, an official court order stipulating that they can no longer be required to pay the eligible outstanding debts.

In the United States, the federal government allows individuals to file for one of two types of bankruptcy: Chapter 7 and Chapter 13. These two forms of bankruptcy have different rules and apply to different financial situations. However, Chapter 11 is also used in rare circumstances. Although Chapter 11 is primarily for businesses, but is used by individuals whose debts exceed the limits defined by Chapter 13. In addition, Chapter 12 is used by fishers and farmers. Bankruptcy is heavily regulated in the United States, and individuals who declare bankruptcy are required to adhere to strict rules and also complete mandatory credit and financial counseling. Although some may view the process as a relatively easy means of escaping one’s debts, personal bankruptcy actually has significant and long-lasting financial ramifications for the debtor, and the decision to declare bankruptcy should not be made lightly.

Background

For as long as human beings have loaned money to one another, there have been people unable to pay their debts. Bankruptcy, as a financial and legal process, has been a fixture of Western society since at least the sixteenth century, and the first British law concerning the practice was introduced in 1542. The United States has had bankruptcy laws for much of its history; the first such law, based on the later, less harsh incarnations of British bankruptcy law, was introduced in 1800 but repealed three years later. Bankruptcy laws returned in various forms over the next centuries—though the first permanent federal law was not enacted until 1898—and became of particular concern during the 1930s, when the Great Depression forced many Americans into extreme poverty. The Bankruptcy Reform Act of 1978 introduced major reforms to bankruptcy law, while the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ushered in further reforms, introducing new regulations to prevent unscrupulous debtors from abusing the system. Among the reforms introduced by the 2005 law were the requirement that those seeking bankruptcy complete credit counseling and the requirement for a means test determining eligibility for liquidation-based bankruptcy.

Generally regarded as an extreme measure, bankruptcy is typically thought of as a last resort for individuals mired in debt that they have no hope of ever repaying. In many cases, an individual’s required debt payments may exceed their monthly income. Often, those who choose to declare bankruptcy have attempted to make payments and work with creditors to establish payment plans but have been unable to do so. Among the types of debt that prompt debtors to consider bankruptcy are mortgages and credit card debt. However, loss of job (or reduced income) and medical debt were one of the most common cause of bankruptcy by the early twenty-first century.

There are some drawbacks to bankruptcy, and individuals considering filing must be sure to be aware of and weigh all of the factors involved. Perhaps the most significant factor is that certain types of debt cannot be discharged through bankruptcy proceedings, and debtors who file for bankruptcy will remain responsible for them. Such debts include child support payments, some delinquent income taxes and government fines, and most student loans (though some changes to discharging student loan debt through Chapter 13 bankruptcy were made in the mid-2020s, standardizing the procedure and guidelines of discharge of this type of debt in case of claims of undue hardship). In addition, bankruptcy has serious and long-lasting financial ramifications, appearing as a major derogatory mark on an individual’s credit report for many years (up to ten years for Chapter 7 and about seven years for Chapter 13, counted from the filing date). The poor credit score resulting from bankruptcy could make it very difficult for the individual in question to obtain loans or credit cards in the future. Finally, there are several procedural requirements of bankruptcy that some individuals may consider significant drawbacks. Filing is not free. The federal government sets the filing fee depending on the type of bankruptcy for which the individual files. Additional fees, such as for legal assistance, which may range from $750 to $4,500, or the required credit counseling, ranging from $50 to $250, could likewise complicate the situation for debtors considering bankruptcy. In total, most individuals spend $1,300 or more to file for bankruptcy.

Eligibility for Chapter 13 is also affected by statutory debt limits, which changed in mid-2020s. A temporary higher combined Chapter 13 debt threshold (set by the Bankruptcy Threshold Adjustment and Technical Corrections Act) sunset on June 21, 2024. After that sunset, the Bankruptcy Code’s debt limits reverted to the secured/unsecured framework, and the Judicial Conference adjusted several bankruptcy dollar amounts effective April 1, 2025 (including the Chapter 13 debt limits).

The Administrative Office of the US Courts reported that total bankruptcy filings increased 10.6% in the twelve-month period ending September 30, 2025, driven primarily by an increase in non-business (consumer) filings.

Overview

Filing for personal bankruptcy is a relatively complex process subject to numerous state and federal regulations. As such, the process should be carried out with great care. Individuals planning to file for bankruptcy should consider consulting a lawyer or government agency to ensure that they meet all requirements and will not face further difficulties at a later date.

Having determined that bankruptcy is the best or only solution to one’s debt problems, one must begin the process of declaring bankruptcy by making an appointment with a government-approved credit counselor, as mandated by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Counseling must be completed within 180 days before the individual’s filing date. During the counseling process, a counselor will review the individual’s finances, discuss potential solutions other than bankruptcy, and help the individual set a budget. After counseling is completed, the counseling agency will issue the debtor a certificate proving that they completed this required step.

Next, the individual must choose which form of bankruptcy they wish to file under, based on their legal eligibility, assets, and debts. To begin the legal bankruptcy process, one must complete paperwork listing all debts, creditors, and assets, as well as supplying information about one’s income, and file the forms with the bankruptcy court in one’s judicial district. The debtor will typically meet with creditors and sometimes court officials, but usually will not be required to appear before a judge unless objecting to some aspect of the proceedings. Depending on the form of bankruptcy they have chosen, the individual will be required either to forfeit property to be liquidated or design and gain approval of a payment plan, which will be used to repay a portion of their debts. In addition to completing one of those processes, the individual must complete an approved debtor education course that teaches financial management skills that they will ideally use to avoid filing for bankruptcy again in the future. Once that is completed and the court has approved the bankruptcy, the individual’s eligible debts are discharged, and they are no longer responsible for making payments.

While US bankruptcy law allows for six different types of bankruptcy, only two are available to individuals: Chapter 7 and Chapter 13. Chapter 7 bankruptcy requires that the debtor’s nonexempt assets be liquidated by a trustee appointed by the court and the proceeds divided among the debtor’s creditors. Assets to be liquidated do not include property deemed exempt by the debtor’s state, which typically includes property that is worth less than a defined monetary value. Chapter 7 bankruptcy is available only to individuals who pass the means test put in place by the 2005 bankruptcy law, which determines, based on income, whether an individual is eligible. An individual is eligible to file for Chapter 7 bankruptcy if their household’s monthly income is less than the median income for a household of that size in their state. An individual with income higher than the median may also qualify if their monthly disposable income—income remaining after certain expenses—is less than a defined amount.

Those who do not qualify for Chapter 7 bankruptcy due to their income may typically file for Chapter 13 bankruptcy, intended primarily for individuals with steady income. Unlike Chapter 7 bankruptcy, Chapter 13 allows debtors to keep rather than liquidate many of their assets. An individual filing for this form of bankruptcy must develop a payment plan based on their projected future income and make payments per that plan for the next three to five years. After that time, their remaining eligible debts are discharged.

Because of the long-lasting ramifications of bankruptcy, many people attempt to avoid it by taking steps to improve their financial situations before such a drastic measure is needed. Crucial steps include reducing spending, avoiding taking out any further debt, and increasing income, either through obtaining a new or additional job or liquidating assets such as valuable personal property and real estate. Some individuals with significant debt can negotiate with their lenders and establish payment plans that make repayment less difficult. Loan consolidation, a process in which an individual takes out a new loan and uses the funds to pay off multiple existing loans, can also be helpful, as it reduces the individual’s regular debt payments. While this strategy does present some risks, it can be helpful for some individuals if managed responsibly.

Credit counseling is also frequently helpful in preventing bankruptcy, as the federal requirement that individuals complete the process prior to filing indicates. Credit counselors can advise individuals on what steps to take, help them budget, and generally improve their financial literacy. However, all individuals considering visiting a credit counselor must be sure to research counselors carefully and work only with legitimate organizations, as unscrupulous credit repair companies have been known to mislead desperate clients and use fraudulent tactics that could easily make one’s financial situation significantly worse.


Bibliography

“Bankruptcy.” Administrative Office of the U.S. Courts, www.uscourts.gov/services-forms/bankruptcy. Accessed 29 Jan. 2026.

“Bankruptcy.” Debt.org, www.debt.org/bankruptcy. Accessed 29 Jan. 2026.

“Bankruptcy Filings Increase 10.6 Percent.” Administrative Office of the U.S. Courts, 24 Nov. 2025, www.uscourts.gov/data-news/judiciary-news/2025/11/24/bankruptcy-filings-increase-10-6-percent. Accessed 29 Jan. 2026.

Bankruptcy Judges Division. Bankruptcy Basics. 3rd ed., Administrative Office of the US Courts, 2011.

“Coping with Debt.” Consumer Information, Federal Trade Commission, Nov. 2012, consumer.ftc.gov/sites/default/files/articles/pdf/pdf-0037-coping-with-debt.pdf. Accessed 29 Jan. 2026.

“Credit Report, How Do I Get a Bankruptcy Removed from My Report?” United States Bankruptcy Court, www.cacb.uscourts.gov/faq/credit-report-how-do-i-get-bankruptcy-removed-my-report. Accessed 29 Jan. 2026.

Curtis, Glenn. “Should You File for Bankruptcy?” Investopedia, 28 July 2024, www.investopedia.com/articles/pf/08/bankruptcy-filing.asp. Accessed 29 Jan. 2026.

Rao, John, et al. Bankruptcy Basics. 3rd ed., National Consumer Law Center, 2023.

Safley, Thomas Max, editor. The History of Bankruptcy: Economic, Social and Cultural Implications in Early Modern Europe. Routledge, 2013.

Smith, Lisa. “Prevent Bankruptcy with These Tips.” Investopedia, 26 Sept. 2025, www.investopedia.com/articles/pf/08/avoid-bankruptcy.asp. Accessed 29 Jan. 2026.

“Student Loan Discharge Guidance.” Department of Justice, 17 Nov. 2022, www.justice.gov/d9/pages/attachments/2022/11/17/student_loan_discharge_guidance_-_guidance_text_0.pdf. Accessed 29 Jan. 2026.

“Student Loan Guidance.” U.S. Trustee Program, 1 May 2025, www.justice.gov/ust/student-loan-guidance. Accessed 29 Jan. 2026.

“Subchapter V and Chapter 13 Debt Thresholds to Sunset by June 21, 2024.” United States Bankruptcy Court, 20 June 2024, www.cacb.uscourts.gov/news/subchapter-v-and-chapter-13-debt-thresholds-sunset-june-21-2024. Accessed 29 Jan. 2026.

Full Article

Personal bankruptcy is a process in which an individual with significant financial debts officially declares they are unable to pay those debts. After filing with a bankruptcy court and either liquidating assets to pay creditors or completing a payment plan over several years, the individual receives a discharge, an official court order stipulating that they can no longer be required to pay the eligible outstanding debts.

In the United States, the federal government allows individuals to file for one of two types of bankruptcy: Chapter 7 and Chapter 13. These two forms of bankruptcy have different rules and apply to different financial situations. However, Chapter 11 is also used in rare circumstances. Although Chapter 11 is primarily for businesses, but is used by individuals whose debts exceed the limits defined by Chapter 13. In addition, Chapter 12 is used by fishers and farmers. Bankruptcy is heavily regulated in the United States, and individuals who declare bankruptcy are required to adhere to strict rules and also complete mandatory credit and financial counseling. Although some may view the process as a relatively easy means of escaping one’s debts, personal bankruptcy actually has significant and long-lasting financial ramifications for the debtor, and the decision to declare bankruptcy should not be made lightly.

Background

For as long as human beings have loaned money to one another, there have been people unable to pay their debts. Bankruptcy, as a financial and legal process, has been a fixture of Western society since at least the sixteenth century, and the first British law concerning the practice was introduced in 1542. The United States has had bankruptcy laws for much of its history; the first such law, based on the later, less harsh incarnations of British bankruptcy law, was introduced in 1800 but repealed three years later. Bankruptcy laws returned in various forms over the next centuries—though the first permanent federal law was not enacted until 1898—and became of particular concern during the 1930s, when the Great Depression forced many Americans into extreme poverty. The Bankruptcy Reform Act of 1978 introduced major reforms to bankruptcy law, while the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ushered in further reforms, introducing new regulations to prevent unscrupulous debtors from abusing the system. Among the reforms introduced by the 2005 law were the requirement that those seeking bankruptcy complete credit counseling and the requirement for a means test determining eligibility for liquidation-based bankruptcy.

Generally regarded as an extreme measure, bankruptcy is typically thought of as a last resort for individuals mired in debt that they have no hope of ever repaying. In many cases, an individual’s required debt payments may exceed their monthly income. Often, those who choose to declare bankruptcy have attempted to make payments and work with creditors to establish payment plans but have been unable to do so. Among the types of debt that prompt debtors to consider bankruptcy are mortgages and credit card debt. However, loss of job (or reduced income) and medical debt were one of the most common cause of bankruptcy by the early twenty-first century.

There are some drawbacks to bankruptcy, and individuals considering filing must be sure to be aware of and weigh all of the factors involved. Perhaps the most significant factor is that certain types of debt cannot be discharged through bankruptcy proceedings, and debtors who file for bankruptcy will remain responsible for them. Such debts include child support payments, some delinquent income taxes and government fines, and most student loans (though some changes to discharging student loan debt through Chapter 13 bankruptcy were made in the mid-2020s, standardizing the procedure and guidelines of discharge of this type of debt in case of claims of undue hardship). In addition, bankruptcy has serious and long-lasting financial ramifications, appearing as a major derogatory mark on an individual’s credit report for many years (up to ten years for Chapter 7 and about seven years for Chapter 13, counted from the filing date). The poor credit score resulting from bankruptcy could make it very difficult for the individual in question to obtain loans or credit cards in the future. Finally, there are several procedural requirements of bankruptcy that some individuals may consider significant drawbacks. Filing is not free. The federal government sets the filing fee depending on the type of bankruptcy for which the individual files. Additional fees, such as for legal assistance, which may range from $750 to $4,500, or the required credit counseling, ranging from $50 to $250, could likewise complicate the situation for debtors considering bankruptcy. In total, most individuals spend $1,300 or more to file for bankruptcy.

Eligibility for Chapter 13 is also affected by statutory debt limits, which changed in mid-2020s. A temporary higher combined Chapter 13 debt threshold (set by the Bankruptcy Threshold Adjustment and Technical Corrections Act) sunset on June 21, 2024. After that sunset, the Bankruptcy Code’s debt limits reverted to the secured/unsecured framework, and the Judicial Conference adjusted several bankruptcy dollar amounts effective April 1, 2025 (including the Chapter 13 debt limits).

The Administrative Office of the US Courts reported that total bankruptcy filings increased 10.6% in the twelve-month period ending September 30, 2025, driven primarily by an increase in non-business (consumer) filings.

Overview

Filing for personal bankruptcy is a relatively complex process subject to numerous state and federal regulations. As such, the process should be carried out with great care. Individuals planning to file for bankruptcy should consider consulting a lawyer or government agency to ensure that they meet all requirements and will not face further difficulties at a later date.

Having determined that bankruptcy is the best or only solution to one’s debt problems, one must begin the process of declaring bankruptcy by making an appointment with a government-approved credit counselor, as mandated by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Counseling must be completed within 180 days before the individual’s filing date. During the counseling process, a counselor will review the individual’s finances, discuss potential solutions other than bankruptcy, and help the individual set a budget. After counseling is completed, the counseling agency will issue the debtor a certificate proving that they completed this required step.

Next, the individual must choose which form of bankruptcy they wish to file under, based on their legal eligibility, assets, and debts. To begin the legal bankruptcy process, one must complete paperwork listing all debts, creditors, and assets, as well as supplying information about one’s income, and file the forms with the bankruptcy court in one’s judicial district. The debtor will typically meet with creditors and sometimes court officials, but usually will not be required to appear before a judge unless objecting to some aspect of the proceedings. Depending on the form of bankruptcy they have chosen, the individual will be required either to forfeit property to be liquidated or design and gain approval of a payment plan, which will be used to repay a portion of their debts. In addition to completing one of those processes, the individual must complete an approved debtor education course that teaches financial management skills that they will ideally use to avoid filing for bankruptcy again in the future. Once that is completed and the court has approved the bankruptcy, the individual’s eligible debts are discharged, and they are no longer responsible for making payments.

While US bankruptcy law allows for six different types of bankruptcy, only two are available to individuals: Chapter 7 and Chapter 13. Chapter 7 bankruptcy requires that the debtor’s nonexempt assets be liquidated by a trustee appointed by the court and the proceeds divided among the debtor’s creditors. Assets to be liquidated do not include property deemed exempt by the debtor’s state, which typically includes property that is worth less than a defined monetary value. Chapter 7 bankruptcy is available only to individuals who pass the means test put in place by the 2005 bankruptcy law, which determines, based on income, whether an individual is eligible. An individual is eligible to file for Chapter 7 bankruptcy if their household’s monthly income is less than the median income for a household of that size in their state. An individual with income higher than the median may also qualify if their monthly disposable income—income remaining after certain expenses—is less than a defined amount.

Those who do not qualify for Chapter 7 bankruptcy due to their income may typically file for Chapter 13 bankruptcy, intended primarily for individuals with steady income. Unlike Chapter 7 bankruptcy, Chapter 13 allows debtors to keep rather than liquidate many of their assets. An individual filing for this form of bankruptcy must develop a payment plan based on their projected future income and make payments per that plan for the next three to five years. After that time, their remaining eligible debts are discharged.

Because of the long-lasting ramifications of bankruptcy, many people attempt to avoid it by taking steps to improve their financial situations before such a drastic measure is needed. Crucial steps include reducing spending, avoiding taking out any further debt, and increasing income, either through obtaining a new or additional job or liquidating assets such as valuable personal property and real estate. Some individuals with significant debt can negotiate with their lenders and establish payment plans that make repayment less difficult. Loan consolidation, a process in which an individual takes out a new loan and uses the funds to pay off multiple existing loans, can also be helpful, as it reduces the individual’s regular debt payments. While this strategy does present some risks, it can be helpful for some individuals if managed responsibly.

Credit counseling is also frequently helpful in preventing bankruptcy, as the federal requirement that individuals complete the process prior to filing indicates. Credit counselors can advise individuals on what steps to take, help them budget, and generally improve their financial literacy. However, all individuals considering visiting a credit counselor must be sure to research counselors carefully and work only with legitimate organizations, as unscrupulous credit repair companies have been known to mislead desperate clients and use fraudulent tactics that could easily make one’s financial situation significantly worse.


Bibliography

“Bankruptcy.” Administrative Office of the U.S. Courts, www.uscourts.gov/services-forms/bankruptcy. Accessed 29 Jan. 2026.

“Bankruptcy.” Debt.org, www.debt.org/bankruptcy. Accessed 29 Jan. 2026.

“Bankruptcy Filings Increase 10.6 Percent.” Administrative Office of the U.S. Courts, 24 Nov. 2025, www.uscourts.gov/data-news/judiciary-news/2025/11/24/bankruptcy-filings-increase-10-6-percent. Accessed 29 Jan. 2026.

Bankruptcy Judges Division. Bankruptcy Basics. 3rd ed., Administrative Office of the US Courts, 2011.

“Coping with Debt.” Consumer Information, Federal Trade Commission, Nov. 2012, consumer.ftc.gov/sites/default/files/articles/pdf/pdf-0037-coping-with-debt.pdf. Accessed 29 Jan. 2026.

“Credit Report, How Do I Get a Bankruptcy Removed from My Report?” United States Bankruptcy Court, www.cacb.uscourts.gov/faq/credit-report-how-do-i-get-bankruptcy-removed-my-report. Accessed 29 Jan. 2026.

Curtis, Glenn. “Should You File for Bankruptcy?” Investopedia, 28 July 2024, www.investopedia.com/articles/pf/08/bankruptcy-filing.asp. Accessed 29 Jan. 2026.

Rao, John, et al. Bankruptcy Basics. 3rd ed., National Consumer Law Center, 2023.

Safley, Thomas Max, editor. The History of Bankruptcy: Economic, Social and Cultural Implications in Early Modern Europe. Routledge, 2013.

Smith, Lisa. “Prevent Bankruptcy with These Tips.” Investopedia, 26 Sept. 2025, www.investopedia.com/articles/pf/08/avoid-bankruptcy.asp. Accessed 29 Jan. 2026.

“Student Loan Discharge Guidance.” Department of Justice, 17 Nov. 2022, www.justice.gov/d9/pages/attachments/2022/11/17/student_loan_discharge_guidance_-_guidance_text_0.pdf. Accessed 29 Jan. 2026.

“Student Loan Guidance.” U.S. Trustee Program, 1 May 2025, www.justice.gov/ust/student-loan-guidance. Accessed 29 Jan. 2026.

“Subchapter V and Chapter 13 Debt Thresholds to Sunset by June 21, 2024.” United States Bankruptcy Court, 20 June 2024, www.cacb.uscourts.gov/news/subchapter-v-and-chapter-13-debt-thresholds-sunset-june-21-2024. Accessed 29 Jan. 2026.

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