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- Bankruptcy is federal law with important state-law inputs
- The main bankruptcy options solve different problems
- Chapter 7 focuses on liquidation
- Chapter 13 uses an individual repayment plan
- Chapter 11 generally provides reorganization
- Filing changes who controls collection
- Discharge and case closure are different events
- Bankruptcy has continuing practical consequences
- A chapter comparison is only a starting point
- Sources
Key Facts
- Federal level: Declaring bankruptcy means commencing a case under the federal Bankruptcy Code; it does not by itself erase every debt.
- Federal level: Chapter 7 generally uses liquidation, Chapter 13 uses an individual repayment plan, and Chapter 11 generally provides reorganization.
- Federal level: Filing usually creates a bankruptcy estate and an automatic stay that pauses many collection actions, subject to exceptions and court orders.
- Federal and state: Federal law governs bankruptcy, while state law can affect property interests and the exemptions available in a particular case.
- Federal level: A discharge affects personal liability for qualifying debts, but liens and nondischargeable debts may remain.
Declaring bankruptcy is the formal act of starting a federal bankruptcy case. The process brings debts, assets, creditor rights, and potential relief into a supervised legal system. It is not a declaration that a person has no money, and it does not produce one automatic outcome for everyone who files.
How bankruptcies work depends first on the chapter used. Different chapters address liquidation, repayment, reorganization, family farming or fishing operations, municipalities, and cross-border cases. For most consumers and ordinary businesses, Chapters 7, 11, and 13 are the central options.
Bankruptcy is federal law with important state-law inputs
Congress enacted the Bankruptcy Code as title 11 of the United States Code, and federal bankruptcy courts administer cases under national statutes and procedural rules. State law still matters because it often defines ownership interests, liens, contracts, and available exemptions.
An exemption protects specified property value from administration for creditors. Federal law permits different exemption systems, and some states require their residents to use state exemptions instead of the federal list. That federal-state interaction can change which property remains protected without changing the federal character of the case.
The main bankruptcy options solve different problems
Chapter 7 focuses on liquidation
Chapter 7 places nonexempt estate property under a trustee’s control for collection and distribution. Many individual cases are described as no-asset cases because no nonexempt property is available for distribution, but that label is a case determination rather than a promise made at filing.
Individuals with primarily consumer debts may be subject to the statutory means-test framework. A Chapter 7 discharge can release personal liability for many debts, while the Code preserves exceptions and permits denial or revocation of discharge in specified circumstances.
Chapter 13 uses an individual repayment plan
Chapter 13 is available to eligible individuals with regular income. The debtor proposes a plan, usually lasting three to five years, and makes payments through a standing trustee. The plan can address arrears and distribute value among claim types under the confirmation rules.
Chapter 13 often allows the debtor to retain property while performing the plan. Completion can lead to discharge of qualifying debts, but missed payments, ineligibility, or other cause can lead to modification, dismissal, or conversion.
Chapter 11 generally provides reorganization
Chapter 11 is commonly used by businesses, although individuals may also qualify. The debtor usually remains in possession, continues operations under statutory duties, and proposes a plan addressing claims and ownership interests.
Creditors may participate through claims, committees, negotiation, and voting. A plan becomes binding only after the bankruptcy court confirms it under the applicable standards. Small business debtors may qualify for streamlined subchapter V procedures.
Filing changes who controls collection
A voluntary case begins with a petition in the appropriate bankruptcy court. Required schedules and statements identify property, debts, income, expenses, contracts, transfers, and other financial information. Individual debtors generally face credit-counseling, identity, tax-document, and disclosure requirements under federal law.
The filing usually creates a bankruptcy estate. It also activates the automatic stay, which pauses many lawsuits, garnishments, foreclosures, repossessions, and collection contacts. The stay has statutory exceptions, may be limited by prior cases, and can be lifted or modified by the court.
A bankruptcy trustee or debtor in possession administers the estate according to the selected chapter. Creditors may file proofs of claim, object to proposed treatment, seek stay relief, challenge dischargeability, or exercise other rights provided by bankruptcy law.
Discharge and case closure are different events
A discharge is a federal order that prohibits collection of discharged debts as personal liabilities. It does not necessarily remove a valid lien from collateral, and it does not discharge every debt. Common statutory exceptions include specified taxes, domestic support obligations, many education loans, and debts arising from certain misconduct.
Case closure is an administrative event after the estate has been fully administered. A case may close after discharge, close without discharge, or remain open after a discharge while administration continues. Dismissal generally ends the case without the relief of a discharge, while conversion moves the case to another chapter when permitted.
Bankruptcy has continuing practical consequences
Bankruptcy filings and many court documents are public federal records. Credit reporting is governed outside the Bankruptcy Code by separate federal law. Access to new credit, housing, insurance, contracts, or business financing may depend on lawful policies and the facts evaluated by another party.
Tax consequences also require separate analysis. The IRS explains that cancellation of debt in bankruptcy can be excluded from gross income under federal tax rules, but tax attributes may be reduced and bankruptcy estates can have distinct filing requirements. The tax treatment varies with the chapter, debtor type, debt, and transaction.
A chapter comparison is only a starting point
The choice among bankruptcy options cannot be reduced to which chapter sounds more favorable. Eligibility, protected property, secured debt, income, business operations, tax obligations, prior cases, litigation, co-obligors, and the desired legal result all shape how a chapter operates.
A useful general comparison asks what happens to property, who administers the estate, whether payments are required, how secured and priority claims are treated, when discharge may occur, and what happens if the case is dismissed or converted. Those questions describe the system without predicting the outcome of any individual case.
Sources
- Title 11, Chapter 7 of the United States Code (2024 edition)
- Title 11, Chapter 11 of the United States Code (2024 edition)
- Title 11, Chapter 13 of the United States Code (2024 edition)
- U.S. Courts overview of the bankruptcy process
- U.S. Courts explanation of bankruptcy discharge
- IRS declaring bankruptcy guidance
