Pros and cons of bankruptcy: A guide

Struggling with large amounts of debt is surprisingly common. Even if you manage your money well and have the best of intentions, sometimes life just happens, through no fault of your own. 

One way to get out of an unmanageable amount of debt is by filing for bankruptcy. Indeed, it’s best left as a last resort, but that doesn’t mean it’s a bad thing. There’s a reason why we have it, and under the right circumstances, filing for bankruptcy can help you move on with your life. 

The key is knowing whether the advantages outweigh the drawbacks. We’ll explore the pros and cons of bankruptcy in this article, so you can gain a better handle on whether it’ll work for you.

Different types of bankruptcy, explained

Bankruptcy isn’t just one thing. In the U.S., people can file for two types of bankruptcy, each of which works very differently and has their own set of pros and cons when it comes to eliminating debt. 

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is reserved for people with a more limited income and offers a quicker path forward, often wrapping up in six months or less. Some of your assets and belongings may be sold to repay your creditors, but often less than you might think. 

Chapter 13 bankruptcy, on the other hand, is known as a wage earner’s plan because it’s structured more like a long-term repayment plan. In most cases, you’ll keep your assets and send in monthly payments to the bankruptcy court for three or five years, after which time your remaining eligible debts will be forgiven. 

Pros and cons of Chapter 7 bankruptcy

A slightly higher percentage of people choose Chapter 7 bankruptcy over Chapter 13. In July 2025, for example, U.S. bankruptcy courts reported that 62% of individual filers opted for Chapter 7 bankruptcy over the prior year, compared to 38% who chose Chapter 13. Part of the reason may be that there are many strong pros of filing for Chapter 7 bankruptcy:

Chapter 7 bankruptcy pros

• Higher success rate: According to the American Bankruptcy Institute, 95% of Chapter 7 bankruptcy cases are successfully completed. 
• Faster debt discharge: Chapter 7 bankruptcy is a quick process. You can file for bankruptcy and be done with it in just a few months, in most cases. 
• Court costs and lawyer fees: Filing for bankruptcy typically costs between $350 and $500, but the real expense comes in hiring a lawyer. Most bankruptcy attorneys charge between $1,250 and $2,200 to help clients through a Chapter 7 bankruptcy case. That’s expensive, but not as much as a Chapter 13 bankruptcy case. 
• Automatic stay from creditors: Your creditors must immediately stop most debt collection efforts when you file for bankruptcy. They can’t foreclose on your home, garnish your wages, or even contact you outside of specified legal guidelines. 
• Keep some or all of your assets: State and federal law clearly outline what can and cannot be taken from you when you file for bankruptcy. In fact, most Chapter 7 bankruptcy cases are “no-asset” cases, meaning that all of a person’s belongings are exempt from being sold, and they get to keep everything.   

Chapter 7 bankruptcy cons

• Not available for everyone: You’ll need to pass a “means test” in order to be eligible for Chapter 7 bankruptcy, which typically means earning below your state’s median income. If you don’t meet the requirements, Chapter 13 bankruptcy may be your only option. 
• Doesn’t work with all debts: Child support payments, alimony, private and federal student loans, and overdue taxes are generally difficult or impossible to discharge in bankruptcy. 
• Co-debtors at risk for collections: If someone co-signed on a debt with you, your bankruptcy filing doesn’t affect them. Creditors are thus free to pursue them for payment now, instead of you.
• Longer-term credit score impact: One of the biggest cons of filing for Chapter 7 bankruptcy is the heavy hit to your credit score, causing a 200-point drop in some cases. Luckily, your credit score will still rise over time, but that mark will stay on your credit report for all potential lenders to see for a full 10 years.  
• Special process for secured debts: Your home and other assets aren’t sold in Chapter 7 bankruptcy, but your lender can still foreclose on them after your bankruptcy case is complete. If you want to keep those assets, you’ll need to be current on your payments and sign a reaffirmation agreement that states you’ll continue to pay the loan.

Pros and cons of Chapter 13 bankruptcy

You’ll repay some of your debts under a Chapter 13 bankruptcy plan, which makes many people feel better. There are also other pros and cons to filing for bankruptcy under Chapter 13, which you should be aware of:

Chapter 13 bankruptcy pros

• Co-debtor protection: If you have a co-signer or a co-borrower on any of your debts, filing for Chapter 13 bankruptcy prevents creditors from pursuing them for repayment, unlike with a Chapter 7 case. 
• Keep your assets: Your non-exempt assets aren’t seized by the court and sold, like in a Chapter 7 case. Instead, you’ll continue paying any secured debts you owe, like your mortgage and car loan. You’ll catch up on any past-due amounts, if anything, on your payment plan.
• Stops debt collection processes: Creditors are automatically barred from collecting most debts when you file for bankruptcy, as with a Chapter 7 case. Those protections stay in place for a Chapter 13 case, too, even through your years-long repayment process.
• Shorter-term credit impact: A Chapter 13 bankruptcy stays on your credit report for seven years from when you first file your case. If you’re set up with a five-year payment plan, that means it’ll stay on your credit report for a further two years after your case is done, allowing a quicker path to rebuild your credit. 
• Works with more debt types: Chapter 13 bankruptcy filers are similarly limited in most of the common types of debts that aren’t eligible for bankruptcy, like student loans and alimony. They may be able to discharge a few more types of debts, though, such as those from divorce settlements.

Chapter 13 bankruptcy cons

• More expensive: Chapter 13 bankruptcy cases take many years and are more complex, which drives up the cost, too. You can expect to spend between $3,125 and $6,250 to work with a lawyer during this time.
• Much longer process: A Chapter 13 bankruptcy case requires you to make monthly payments for three or five years, depending on your income, before you’re even eligible for any debts to be discharged.
• Lower success rates: The years-long timeline for a Chapter 13 bankruptcy case leaves ample room for things to go wrong, such as losing your job or becoming ill. That’s one reason why Chapter 13 bankruptcy has a lower success rate, ranging from 40% to 70%. 

Bankruptcy alternatives

Many people with overwhelming amounts of debt find great relief after they declare bankruptcy. Even so, it’s not the right choice for everyone, and it’s wise to consider the alternatives first. You might find a better option, or at least rule them out so you can be more confident that bankruptcy really is the right route. 

Here are some common alternatives to bankruptcy:

• Debt consolidation: If you have a decent credit score, a debt consolidation loan can help you pay off your unsecured debt, like credit cards or medical bills. This can help you avoid higher interest rates and secure more comfortable loan payments.  
• Debt management plan: Credit counseling agencies can offer support and guidance in navigating debt problems. Sometimes that involves debt management plans, which are functionally similar to a Chapter 13 repayment plan, but without the need to declare bankruptcy. 
• Debt settlement: Financial advocates caution against using debt settlement companies, which have you intentionally default on your debt in the hopes that the company can negotiate a lump-sum payment to release you from the debt. It’s not guaranteed to work, and if it doesn’t, you could be sued by your creditors. If it does work, you’ll pay a high cost to the company and face a potentially large tax bill at the end of the year. 

Final thoughts

Declaring bankruptcy isn’t a decision to be taken lightly, but you don’t have to make that call alone. Nonprofit credit counseling agencies can help advise you on your options, including whether bankruptcy can help in your case. Fiduciary-based financial advisors can also help, as can bankruptcy attorneys. 

In any case, remember: debt isn’t always permanent, even though it sometimes seems like it. Take care of yourself first, and when you’re ready to deal with it, you’ll be able to assess the right path forward more clearly.