Filing personal bankruptcy under federal law provides honest but overwhelmed debtors with a legal financial fresh start. Consumer bankruptcy is governed by Title 11 of the U.S. Code, primarily through Chapter 7 (liquidation) and Chapter 13 (reorganization).
Chapter 7 Bankruptcy: Total Debt Discharge
Chapter 7 liquidates non-exempt assets to satisfy creditors, though most filers utilize statutory federal or state bankruptcy exemptions to keep their primary home, vehicle, retirement accounts, and personal belongings. Unsecured debts (credit cards, personal loans, medical bills) are completely discharged within 90 to 120 days.
Chapter 13 Bankruptcy: Court-Supervised Repayment Plan
Chapter 13 restructures debts into a manageable 3- to 5-year court-supervised repayment plan. It is ideal for wage-earners who exceed the Chapter 7 Means Test or who need to halt foreclosure proceedings and cure mortgage arrears over time.
The Chapter 7 Means Test
To qualify for Chapter 7, your gross household income must be below your state's median income for your family size. If above, you must pass the Means Test calculation showing insufficient disposable monthly income to fund a Chapter 13 plan.