Bankruptcy: Definition, Types, Process, Cost and Alternatives

Written by Ascend Team
Updated Feb 12th, 2024
This article is for informational purposes only. Ascend does not provide legal advice, and are not attorneys. If you'd like to speak with a bankruptcy attorney that serves your city, you can speak with one in a free consultation.

You may be struggling to make ends meet each week and wonder what your bankruptcy options are to eliminate the debt that is crippling. Many people would like to file Chapter 7 bankruptcy with no money, but unfortunately there are still costs in bankruptcy. The purpose of this article is to provide information about bankruptcy to help you make an informed decision about what's best for you.

Bankruptcy Definition

What is bankruptcy? Bankruptcy is legally binding where a debtor can no longer pay their monthly loans anymore that was once obligated to. It is a way to seek relief from debt so the debtor files bankruptcy for a discharge form. It will then eliminate and forgive all debts that were supposed to be owed.

Types of Bankruptcy

There are different types of bankruptcy you should know and understand. So what are the different types of bankruptcy? 

  • Chapter 7: For Liquidation
  • Chapter 13: Repayment Plan 
  • Chapter 11: Large Reorganization
  • Chapter 12: For Family Farmers
  • Chapter 15: For Foreign Cases

These are 5 different types of bankruptcy that an individual may file for. Each one is different based on the individual financial situation. The two that we will be discussing are Chapter 7 and Chapter 13 bankruptcy. 

Additional Reading: How Much Do You Have To Be in Debt To File Chapter 7?

The two most common consumer bankruptcy is the Chapter 7 and Chapter 13 bankruptcy, so let's go through the differences now.

Chapter 7 Bankruptcy

So Chapter 7 bankruptcy is also considered liquidation bankruptcy. Though don’t worry, most of the time you get to keep your house and your car. Chapter 7 bankruptcy is meant to help eliminate a huge portion of your unsecured debt. Chapter 7 bankruptcy is also often much less expensive than a Chapter 13 bankruptcy. A Chapter 7 means test calculator can help you estimate Chapter 7 qualification and cost.

You may receive a discharge within 120 days. One thing to remember is that it will stay on your credit report for 10 years. That said, you are often able to get access to credit much sooner. You can potentially get a secured credit card within 6 months of receiving your bankruptcy discharge.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is also known as wage-earner bankruptcy. Chapter 13 bankruptcy is a voluntary reorganization of debt. A Chapter 13 calculator can help you estimate a Chapter 13 repayment plan example.

 In Chapter 13 bankruptcy, the individual has debt that they can no longer manage and may own assets that exceed state and/or federal relief. Some people file for Chapter 13 bankruptcy because they fail to qualify for Chapter 7 bankruptcy.

For Chapter 13, most individuals qualify to file as long as they are below the debt limits. Compared to Chapter 7, there is no liquidation in Chapter 13 Bankruptcy. That said, the Chapter 13 payment plan is often 3 or 5 years (unless you pay 100% of your debt back), and it will stay on your credit report for 7 years. 

How Does Bankruptcy Help You With Your Debt?

Bankruptcy can discharge (forgive) certain debts, which can provide a fresh start. What are the types of your debt? The types of your debt will help determine whether they will be eliminated in bankruptcy.

Debts that are often forgiven:

  1. Credit cards
  2. Medical debts
  3. Personal loans
  4. Old utility bills
  5. Many judgment debts
  6. Old rent and lease payments

Debts that are not often forgiven:

  1. Student loans
  2. Secured debts such as home and car
  3. Back alimony or child support payments
  4. Most debts owed to the government
  5. Judgments related to DUI accidents
  6. Most tax debts
  7. Administrative costs of the bankruptcy case
  8. Restitution in criminal cases
One thing that can be helpful is to determine which debts you will have forgiven and which debts may not be forgiven in bankruptcy.

Filing Bankruptcy In Your State

Many elements of bankruptcy are the same across the United States. That said, states and districts often have unique local rules, bankruptcy exemptions, attorney fees, means testing, etc., so it’s important to read about the bankruptcy process in your state. You can check the unique articles for rules for filing bankruptcy in your state below.

Filing Bankruptcy in Alaska
Filing Bankruptcy in Alabama
Filing Bankruptcy in Arkansas
Filing Bankruptcy in Arizona
Filing Bankruptcy in California
Filing Bankruptcy in Colorado
Filing Bankruptcy in Connecticut
Filing Bankruptcy in District of Columbia
Filing Bankruptcy in Delaware
Filing Bankruptcy in Florida
Filing Bankruptcy in Georgia
Filing Bankruptcy in Hawaii
Filing Bankruptcy in Iowa
Filing Bankruptcy in Idaho
Filing Bankruptcy in Illinois
Filing Bankruptcy in Indiana
Filing Bankruptcy in Kansas
Filing Bankruptcy in Kentucky
Filing Bankruptcy in Louisiana
Filing Bankruptcy in Massachusetts
Filing Bankruptcy in Maryland
Filing Bankruptcy in Maine
Filing Bankruptcy in Michigan
Filing Bankruptcy in Minnesota
Filing Bankruptcy in Missouri
Filing Bankruptcy in Mississippi
Filing Bankruptcy in Montana
Filing Bankruptcy in North Carolina
Filing Bankruptcy in North Dakota
Filing Bankruptcy in Nebraska
Filing Bankruptcy in New Hampshire
Filing Bankruptcy in New Jersey
Filing Bankruptcy in New Mexico
Filing Bankruptcy in Nevada
Filing Bankruptcy in New York
Filing Bankruptcy in Ohio
Filing Bankruptcy in Oklahoma
Filing Bankruptcy in Oregon
Filing Bankruptcy in Pennsylvania
Filing Bankruptcy in Rhode Island
Filing Bankruptcy in South Carolina
Filing Bankruptcy in South Dakota
Filing Bankruptcy in Tennessee
Filing Bankruptcy in Texas
Filing Bankruptcy in Utah
Filing Bankruptcy in Virginia
Filing Bankruptcy in Vermont
Filing Bankruptcy in Washington
Filing Bankruptcy in Wisconsin
Filing Bankruptcy in West Virginia
Filing Bankruptcy in Wyoming

Filing Bankruptcy Process

Let’s go over the process of Chapter 7 bankruptcy. First off you have to make sure you understand if you qualify for it. You can do this by either using a bankruptcy calculator or a free evaluation from an attorney. You should always want to work with the best so it is good to consider the referrals, reviews, and rates from others’ experiences. Once through with that, it is time to look over the payment of having an attorney. Good thing is that many attorneys understand what you are going through and have created a payment plan. Then once you are prepared for everything it is time to go through with the process. It can be a difficult road ahead but something that may need to be done for the better. 

Now let’s get into the process of Chapter 13 bankruptcy. It is a bit more complex when going through the process of Chapter 13 bankruptcy. You start off by having to file a bankruptcy petition with the local bankruptcy court. Afterward, you have to state your assets/liabilities. As well as submit a schedule of your income and expenditures. Then show a statement of financial affairs. The filing must have all requirements for credit counseling and payments from the employer. Providing as well your tax returns to your trustee. Then from there the process continues through court and begins payments to the trustee after 30 days of filing. 

1: Deciding What Bankruptcy Type is Best For You

Estimate bankruptcy qualification based on your zip code. Understand the pros and cons of Chapter 7 and Chapter 13 bankruptcy. It is a good idea to always do all your research to have the best step forward when choosing which bankruptcy best fits you. 

2: Decide whether to hire an attorney and find an attorney

You can decide to file bankruptcy with or without an attorney.

When deciding to find the right bankruptcy attorney for you and your case, it's important to evaluate them and their reviews. What you should be looking for, for instance, 1) Referral 2) Reviews 3) Relevancy 4) Rates 5) Reliability. You can also contact your local attorney and most will have a free consultation. 

Also, when looking into the fees, fear not! Attorneys understand your situation and have a payment plan for you to help you through the process. 

3: Take Mandatory Credit Counseling Course

When filing for bankruptcy, you must take 2 mandatory credit counseling courses to complete the process of bankruptcy. The pre-bankruptcy credit counseling course is the first one you have to complete. The second course is called pre-discharge debtor education.

4: File Bankruptcy Petition and Other Forms

To start the process to file for bankruptcy, there are many bankruptcy forms that you have to fill out. In these required forms that frame the petition are the financial affairs/schedules as: 

  • List of all creditors/amounts of the claims
  • Source of income including the amount/frequency
  • All of the property you possess
  • A  list of your monthly living expenses

5: Bankruptcy Trustee is Assigned To Your Case

After that, a bankruptcy trustee will be assigned to you to review your documents and nonexempt properties you may own. You will also need to submit your recent tax return forms. Side note, if you do have non-exempt property, the trustee will be able to manage the sale/liquidation.  

6: Attend 341 Meeting of Creditors

The meeting of creditors is a mandatory meeting for the debtors. The meeting may take place on the phone or over video conference or in person. In the meeting, you will be asked by a trustee a couple of questions with your attorney (if you have one). Usually, the meeting is about 15 minutes or less. After the meeting, the trustee will review the information and confirm whether you qualify for Chapter 7 bankruptcy (if applicable).

7: Take Second Mandatory Debt Education Course

So now you have to take the secondary mandatory debt education course so that way you can file for discharge. Afterward, you will obtain a certificate of completion and your attorney. Once the file is complete, you will have to wait to receive your discharge.

8: Receive Your Bankruptcy Discharge

Once you have concluded all the steps, you will then wait for your bankruptcy discharge. When you receive your discharge it should come through the mail. You can receive your discharge often within 120 days. 

Bankruptcy Cost

Well, how much does it cost to go bankrupt? Luckily, most bankruptcy attorneys have a payment plan that you can use throughout the process. Though the cost can still vary depending on the situation. For example, the type of bankruptcy case, the complexity of the case, location, attorney’s involvement, and their given expertise. In bankruptcy, there is a fixed and variable cost. With fixed costs, they are the filling/administrative fees. While the variable cost is for the attorney fees. 

Bankruptcy Alternatives

Debt Settlement

if your debt becomes too hard to pay off you can use debt settlement. Debt settlement is when someone is able to negotiate to lower your debt less than what you owe. So, a portion of what you were supposed to pay back will be lifted. For instance, if you owe in debt $50,000, debt settlement will be able to negotiate the amount down to $25,000. So then how does the process of debt settlement work?

In the process of debt settlement, you use a debt settlement company to help you through the journey. So the debt settlement companies are the link you need for what you owe in debt and to the creditor. The debt settlement company will create for you an escrow bank account. That’s where all the funds will be collected. Afterward, they will combine all the payments into one for the creditors. They will negotiate for you and help to lower your debt. Then you will accept your settlement and start your new monthly payment plan. Finally, you will start sending payments to the creditors until you are done paying off your debt.

Though we also have to consider some of the disadvantages. For instance, how debt settlement can have a negative effect on your credit score depending on your situation. Most of the time it will impact negatively on your credit score throughout the duration. There are also extra costs and fees when using debt settlement. 

Debt Management

Another alternative is called debt management. Debt management is when you work with a company, for instance, credit counseling or debt consolidation to help manage your debts. Don’t get confused though! It is supposed to lower your interest rates when you pay through the company. Also, be able to waive certain fees you might owe. From there, you can use that money instead towards the monthly payment that you are paying off. Which your debts will then be paid off faster than it was before. The process starts off with meeting a debt management counselor. Then they will look at all your debts. From there they will conclude how long it will take to pay off your debts. Most of the time it will take around three to five years. Then a new monthly payment is made for you. 

Credit counseling companies and non/profit debt management agencies make it seem so easy Though there are service and maintenance fees you will have to pay for. This means you will be paying your debts and also the extra fees that come with it. In reality, you might not be saving when paying off your debts. You also have to close your credit cards because they want to make sure you don’t owe any more debt over time. 

Debt Payoff Planning

You can also consider using a debt payoff planner. For instance, the Savvy Debt Payoff Planner is another alternative. It is an app on iOS and Android where it will help you get out of debt quicker. The Savvy debt payoff planner has a zero-based budget that motivates you throughout the journey of getting out of debt. It shows how your debt freedom date moves closer and your debt decreases. It is also super easy and simple to figure out how to use. You can add your bank accounts, credit cards accounts, and loans that you still owe. As well as automate a budget and a payoff planner that fits just right for you and your expenses. 

It also has its own payoff method called the savvy method. What it does is uses both snowball and avalanche methods. So when using the savvy method,  it will help fire you up as you see yourself paying off your debts. As well as earn some of the interest savings because of the avalanche method. 


Bankruptcy can provide debt relief to those who need it the most. It can provide a fresh start to restart your finances. That said, you may want to consider the costs, qualification, process, pros and cons, and alternatives before making the decision of whether bankruptcy is best for you.