Bankruptcy
Bankruptcy
Quick Definition
Bankruptcy is a federal legal process that provides relief to individuals and businesses that cannot repay their debts. Governed by the U.S. Bankruptcy Code, it allows debtors to either liquidate assets to pay creditors (Chapter 7) or restructure debts while continuing operations (Chapter 11 for businesses, Chapter 13 for individuals). It is a legal right, not a crime.
What It Means
Bankruptcy exists because functional economies need a mechanism for handling financial failure. Without it, debtors would remain permanently trapped by unpayable obligations, creditors would have no orderly process to recover what they can, and the economic mobility that enables second chances would disappear.
For individuals, bankruptcy eliminates most unsecured debt but severely damages credit and may require surrendering non-exempt assets. For businesses, it allows reorganization under court protection, giving management time to restructure operations and debt without creditors seizing assets.
2026 Filing Statistics
Bankruptcy filings have been rising steadily since hitting a post-pandemic low in June 2022. According to the Administrative Office of the U.S. Courts and Epiq AACER:
| Metric | 2025 Full Year | H1 2026 | Trend |
|---|---|---|---|
| Total filings | 574,314 | 310,550 | +12% vs H1 2025 |
| Individual Chapter 7 | 356,724 | 187,572 | +15% vs H1 2025 |
| Individual Chapter 13 | 203,118 | 104,997 | +8% vs H1 2025 |
| Commercial Chapter 11 | 9,201 | 4,589 | +28% vs H1 2025 |
| Subchapter V elections | N/A | 1,663 | +50% vs H1 2025 |
| Consumer share of total | 96% | ~95% | Consistently consumer-driven |
Despite the upward trend, total filings remain about 25% below the 2018-2019 pre-pandemic average. The 2025 total of 574,314 compares to 774,940 in 2019. The current trajectory reflects a return toward historical norms rather than a surge into new territory.
The 50% rise in Subchapter V elections (a streamlined Chapter 11 for small businesses with debts under $2.75 million) underscores the mounting challenges facing small businesses amid higher borrowing costs and softening demand.
The Main Types of Bankruptcy
| Chapter | Who Uses It | What Happens | Duration |
|---|---|---|---|
| Chapter 7 | Individuals, businesses | Liquidation; non-exempt assets sold; most debts discharged | 3-6 months |
| Chapter 11 | Businesses (and some individuals) | Reorganization; debts restructured; operations continue | 1-3+ years |
| Chapter 13 | Individuals with regular income | Repayment plan over 3-5 years; keep assets; discharge remaining debt | 3-5 years |
| Chapter 12 | Family farmers and fishermen | Similar to Chapter 13; tailored to agricultural cash flows | 3-5 years |
| Chapter 9 | Municipalities | Adjustment of municipality debts | Varies |
Chapter 7: Liquidation Bankruptcy
The most common individual bankruptcy, accounting for 62% of all 2025 filings. A trustee sells non-exempt assets to pay creditors, then most remaining unsecured debts are discharged. The median time from filing to discharge was 110 days in 2024.
What is typically discharged:
- Credit card debt
- Medical bills
- Personal loans
- Utility arrears
What cannot be discharged:
- Student loans (in most cases)
- Child support and alimony
- Recent tax debts (generally past 3 years)
- Debts from fraud or criminal activity
- Recent large purchases or cash advances (within 70-90 days)
Means test: Chapter 7 requires passing a means test. Your income must be below your state's median income, or your disposable income after allowed expenses must be insufficient to fund a Chapter 13 plan.
Exempt assets (protected from liquidation, varies by state):
- Homestead exemption (varies widely: $0 in some states, unlimited in Florida and Texas)
- One vehicle up to certain value
- Retirement accounts (IRAs, 401(k)s fully protected federally)
- Tools of trade
- Personal property up to certain limits
Chapter 13: Reorganization for Individuals
For individuals with regular income who want to keep assets (especially a home facing foreclosure) and repay a portion of debts over 3-5 years. In 2025, Chapter 13 accounted for 36% of all filings.
Advantages over Chapter 7:
- Keep home (pay arrears through the plan)
- Keep non-exempt assets
- Co-signers are protected during the plan
- Can strip a junior mortgage lien if completely underwater
2026 debt limits (effective April 1, 2025 through March 31, 2028):
| Debt Type | Limit |
|---|---|
| Unsecured debt | Less than $526,700 |
| Secured debt | Less than $1,580,125 |
These limits increased 13.2% from the previous period ($465,275 unsecured and $1,395,875 secured), adjusted for inflation under Section 104 of the Bankruptcy Code. The limits are separate: if either category exceeds its cap, the individual is ineligible for Chapter 13 regardless of how much room exists under the other category.
Completion rate warning: According to the U.S. Courts Judicial Business 2024 report, only 49% of Chapter 13 cases that closed in 2024 ended in a successful discharge. Roughly half of people who enter Chapter 13 do not make it through to completion.
Chapter 11: Business Reorganization
Allows businesses to restructure while continuing operations. Management typically stays in control as debtor-in-possession while developing a reorganization plan.
Notable Chapter 11 cases:
| Company | Year Filed | Outcome |
|---|---|---|
| General Motors | 2009 | Emerged in 40 days, restructured successfully |
| American Airlines | 2011 | Emerged 2013, merged with US Airways |
| Sears | 2018 | Emerged as smaller operation |
| Toys "R" Us | 2017 | Liquidated 2018 |
| WeWork | 2023 | Reorganization underway |
| Bed Bath & Beyond | 2023 | Liquidated |
Commercial Chapter 11 filings in H1 2026 reached 4,589, up 28% from H1 2025. The total Chapter 11 filings of 8,952 in 2025 were 38.5% above the 2018-2019 pre-pandemic average of 6,465, indicating structurally elevated business distress.
Bankruptcy's Impact on Credit
Filing bankruptcy severely damages your credit profile:
| Impact | Duration |
|---|---|
| Chapter 7 stays on credit report | 10 years |
| Chapter 13 stays on credit report | 7 years |
| Immediate credit score drop | 130-200 points typically |
| Difficulty getting new credit | 1-3 years post-discharge |
| Higher interest rates on any new credit | For years afterward |
Credit score recovery timeline (approximate):
- 1-2 years post-discharge: Start rebuilding with secured cards, scores may recover to 600s
- 3-4 years: Mid-600s possible with consistent on-time payments
- 5-7 years: High-600s to low-700s possible, bankruptcy still on report but less weighted
- 7-10 years: Bankruptcy removed, full recovery possible with responsible behavior
Alternatives to Bankruptcy
Before filing, consider:
| Alternative | Best For |
|---|---|
| Debt negotiation | One-time settlement for less than owed |
| Debt management plan (DMP) | Structured repayment through nonprofit credit counseling, lower interest |
| Debt consolidation loan | Replace high-rate debt with one lower-rate loan |
| Forbearance or deferment | Temporary pause on mortgage or student loan payments |
| Balance transfer | Move credit card debt to 0% APR promotional period |
Common Mistakes to Avoid
- Raiding retirement accounts to avoid bankruptcy: Retirement accounts are fully protected in bankruptcy. Withdrawing them to pay dischargeable debts costs you the money twice: once in payments, once in taxes and penalties. IRAs and 401(k)s are federally exempt, meaning no trustee can touch them in a Chapter 7 filing.
- Taking on more debt right before filing: Debts incurred through fraud or large purchases within 70-90 days before filing may not be dischargeable and can result in criminal charges. Courts look for patterns of charging up credit cards or taking cash advances shortly before filing.
- Not exploring alternatives first: Bankruptcy has lasting consequences. For many situations, debt negotiation, hardship programs, or credit counseling through a nonprofit agency may resolve the problem without a bankruptcy filing. The National Foundation for Credit Counseling (NFCC) offers free initial consultations.
- Choosing Chapter 13 without understanding the completion rate: Only 49% of Chapter 13 cases that closed in 2024 ended in successful discharge. If your income is unstable or your budget has no margin for error, the 3-5 year repayment plan may fail, leaving you worse off than if you had filed Chapter 7 initially.
- Filing without understanding state exemption laws: Bankruptcy exemptions vary dramatically by state. Florida and Texas offer unlimited homestead exemptions, while some states cap homestead protection at $25,000 or less. Moving to a new state shortly before filing can complicate which state's exemptions apply (you must have lived in the state for 730 days to use that state's exemptions).
Related Concepts
- Credit Score - How bankruptcy impacts your credit and how long it takes to recover
- Debt - The obligations that bankruptcy seeks to discharge or restructure
- Foreclosure - The process bankruptcy can temporarily or permanently halt through the automatic stay
- 401(k) - Retirement accounts that are federally protected from bankruptcy liquidation
- Debt Consolidation - An alternative to bankruptcy that combines multiple debts into one payment
Key Points to Remember
- 574,314 total filings in 2025, up 11% from 2024, with H1 2026 showing 12% further growth
- Chapter 7 accounts for 62% of filings and discharges most unsecured debt in 3-6 months
- Chapter 13 debt limits (April 2025 through March 2028): $526,700 unsecured, $1,580,125 secured
- Only 49% of Chapter 13 cases completed successfully in 2024, making Chapter 7 the more reliable path for many filers
- Commercial Chapter 11 filings jumped 28% in H1 2026, with Subchapter V small business elections up 50%
- Retirement accounts (IRAs, 401(k)s) are federally protected and should never be drained to pay dischargeable debts
Frequently Asked Questions
Q: Will I lose my home if I file Chapter 7? A: It depends on your state's homestead exemption and your equity. States like Florida and Texas have unlimited homestead exemptions, meaning you can keep any amount of equity. Other states cap it at $25,000 to $75,000. If equity exceeds your exemption, the trustee may sell the home and pay you the exemption amount.
Q: Can both spouses file together? A: Yes. Married couples can file a joint petition, combining their debts and exemptions. Joint filing is typically more efficient than filing separately. Note that the Chapter 13 debt limits are not doubled for joint filers: the $526,700 unsecured and $1,580,125 secured caps apply to combined debts.
Q: Does bankruptcy stop foreclosure? A: Yes, temporarily. Filing bankruptcy triggers an automatic stay, meaning all collection actions including foreclosure must cease immediately. Chapter 13 can permanently stop foreclosure if you resume mortgage payments and repay arrears through the plan. Chapter 7 only delays foreclosure unless you can get current on payments.
Q: Are bankruptcy filings increasing in 2026? A: Yes. H1 2026 saw 310,550 total filings, a 12% increase from H1 2025. Individual Chapter 7 filings rose 15%, and commercial Chapter 11 filings rose 28%. However, total filings remain about 25% below pre-pandemic (2018-2019) levels, suggesting a normalization toward historical norms rather than a crisis surge.
Q: Can student loans be discharged in bankruptcy? A: In most cases, no. Student loans can only be discharged if you prove "undue hardship" through an adversary proceeding, which is a separate lawsuit within the bankruptcy case. The standard varies by circuit but generally requires showing that you cannot maintain a minimal standard of living while repaying the loans, that your financial situation is unlikely to improve, and that you have made good-faith efforts to repay.
Related Terms
Distressed Securities
Distressed securities are stocks or bonds of companies in financial trouble, trading at deep discounts. Specialist investors buy them betting on recovery, restructuring, or liquidation value.
Deed in Lieu
A deed in lieu of foreclosure is a voluntary agreement where a homeowner transfers their property title to the lender to avoid the foreclosure process and its long-term credit consequences.
Personal Loan
A personal loan is an unsecured installment loan that provides a fixed lump sum repaid in equal monthly payments over a set term, commonly used for debt consolidation, home improvement, or major expenses without requiring collateral.
Collateral
Collateral is an asset pledged to a lender as security for a loan. If the borrower defaults, the lender can seize the collateral to recover the unpaid debt, which is why secured loans carry lower interest rates.
Short Sale
A short sale is a real estate transaction where a homeowner sells their property for less than the outstanding mortgage balance, with lender approval, as an alternative to foreclosure when the home is underwater and the owner can no longer make payments.
Tax Levy
A tax levy is the IRS's legal seizure of a taxpayer's property to satisfy unpaid tax debt, including wage garnishment and bank account seizure. In 2026, automated collection systems are driving faster enforcement.
Related Articles
Medical Debt: What Your Rights Are and How to Handle It
Medical debt is the leading cause of bankruptcy in the United States. But it works differently from other debt, and knowing the rules gives you real options most people never use.
Why Nobody in My Family Talked About Money (And How I Figured It Out Anyway)
Only 24% of parents talk about money often with their children. If your family never discussed finances, you are not alone. Here is why the silence exists, what it costs you, and how to learn what no one taught you.
What Happens If You Stop Paying Your Student Loans?
Missing student loan payments triggers a chain of consequences that gets worse the longer it goes on. Here is exactly what happens, when it happens, and what your options are before it gets out of hand.
What a Pension Is Worth in Today's Market: How to Assign It a Dollar Value
A $3,000/month pension was worth $680,000 as a lump sum in 2021. At 2026 interest rates, it is worth $440,000. The pension did not change. The rates did. Here is how to calculate what your pension is actually worth.
What Happens Financially If You Get Sued? Asset Protection Basics
Most people have no idea which of their assets can be taken in a lawsuit and which are protected. Here is a plain-English breakdown of what is at risk and how to reduce your exposure.
