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What is bankruptcy? The pros and cons of filing and other options to consider 

Photo illustration of a $1 bill that has been mostly shredded, it is still connect on the right edge.
Filings for Chapters 11 and 13 both increased in 2022.
Photo illustration by Fortune; Original photo by Getty Images

We always thing of debt as a bad thing—but that’s not always the case.

It can be an invaluable tool in reaching some of your most important financial milestones. Perhaps you’re borrowing to purchase your dream home, finance your vehicle, or start a business. Checking off those financial to-dos are often made possible by new debt. 

Still, debt management can be a challenge for many and often may not be at the forefront of their minds until they’ve found themselves in the red. 

Filings for Chapters 11 and 13 both increased in 2022. Chapter 11, which provides for reorganization of business debts, increased to 4,918, compared with 4,836 in the previous year. Chapter 13 filings, the most common bankruptcy filing for individuals with regular income, increased from 120,002 to 157,087 at the end of 2022. 

But what does it mean to file for bankruptcy and why do debtors resort to this option? 

What is bankruptcy?  

Bankruptcy is a legal process that individuals and businesses can lean on as a way to eliminate all or a portion of their debt. This may not be the most suitable option for every individual who has accumulated an unmanageable debt load as there are requirements they’ll have to meet to be eligible to file for bankruptcy. It’s also important to note that going down this road will have implications on your overall financial health. 

“Bankruptcy is actually a legal status, which protects debtors and helps them with their obligations to creditors,” says Derek Jacques, a bankruptcy attorney with The Mitten Law Firm. “It can offer a fresh start to individuals or businesses that have gotten in over their heads, often through no fault of their own.” 

The different types of bankruptcy filings

There are several types of bankruptcies and the type of bankruptcy that is most suitable for your financial situation may vary. A few of the most common types include: 

  • Chapter 7: Sometimes referred to as straight or liquidation bankruptcy, this type of bankruptcy appoints a bankruptcy trustee who is responsible for gathering and selling the debtor’s nonexempt assets. Those proceeds are then issued to creditors as repayment. To be eligible for Chapter 7, you must pass the means test to verify that you actually need to file. If your current monthly income is more than the state median, the Bankruptcy Code requires a “means test.” You also must not have had a Chapter 7 discharge in the past eight years, or a Chapter 13 discharge in the past six years. 
  • Chapter 13: As opposed to a complete liquidation of your debt, a chapter 13 bankruptcy aims to make your debt more manageable. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. A Chapter 13 bankruptcy stays on your credit report for seven years, and you can’t file for it again until after two years. 
  • Chapter 11: Chapter 11 bankruptcy is usually used by businesses or corporations to come up with a plan to reorganize their business so that they can continue to operate while paying off their debt. In this case, both the court and the creditors must sign off on this plan. 

When to consider bankruptcy, plus a few major pros and cons 

If your debt has become overwhelming and you don’t see a way out of it within a reasonable amount of time, without some sort of intervention, declaring bankruptcy might be a worthwhile option.  

“Some signs you should file for bankruptcy include: Harassing phone calls and letters from debt collectors, you are at risk of eviction or foreclosure on your home, your car is being repossessed, or if your credit cards are maxed out,” says Jacques. 

If you’re considering filing for bankruptcy, you may want to think carefully about the benefits and drawbacks of doing so. 


  • Debt collectors will pump the brakes. Once you file for bankruptcy, certain debt collection practices come to a stop. “Debt collection activity is halted, so you can avoid some of the worst things about being in debt like foreclosure or repossession,” says Jacques. 
  • Filing for bankruptcy may protect some of your assets. Once you’ve filed, any wages you earn cannot be garnished to repay creditors for any discharged debt. This could help provide some peace of mind and help you focus on repayment. 


  • Filing for bankruptcy can seriously impact your credit. A bankruptcy will stay on your credit report for up to 10 years, which can hurt your ability to apply for a new loan, credit card, rental home, or hit some of your other financial goals. 
  • Filing for bankruptcy isn’t free. Typically, you’ll need to enlist the support of an experienced attorney to guide you through this process, in addition to the filing and court fees you’ll be responsible for. 

Alternatives to filing for bankruptcy 

Filing for bankruptcy may help simplify things in the short-term, but the effects of a bankruptcy filing are long-lasting. As such, it’s important to consider all of your options before resorting to this option. Some alternatives to consider might include: 

  1. Debt repayment plans: Working directly with your lender to discuss your debt repayment options should be your first course of action. Your lender may be willing to work with you to come up with a plan that makes your debt more manageable and won’t require any legal action or a hit to your credit score.
  2. Debt consolidation: Debt consolidation is another option that could not only simplify your debt repayment, but also potentially save you money long term. A debt consolidation loan allows you to convert multiple debts into a single payment to simplify or streamline debt management. If you secure a loan with a lower interest rate than your existing loans, you might also expect to save on interest over time. 
  3. Home equity loan: Another type of loan that could help you chip away at your debt is a home equity loan. While this may provide an additional low-interest option, this type of loan is not without its own set of risks. A home-equity loan allows you to borrow against the market value of your house and receive a lump-sum payment in return. The catch: your home will serve as collateral for the loan if you’re unable to repay it. 

The takeaway 

Filing for bankruptcy can have serious consequences on your personal finances and should be considered carefully before you decide to file. If you’re saddled with unmanageable debt, consult with your lenders and potentially a legal expert to determine what your options are and decide on the best course of action.

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