Voluntary Bankruptcy

Voluntary bankruptcy is a legal proceeding that an individual or business initiates by filing a petition with the federal bankruptcy court. The filer, not a creditor, makes the decision to seek bankruptcy protection. This distinguishes voluntary bankruptcy from involuntary bankruptcy, where creditors force a debtor into the process by filing on the debtor's behalf. Voluntary bankruptcy is by far the most common form: in calendar year 2025, U.S. courts recorded 557,376 total bankruptcy filings, the vast majority of which were voluntary, representing an 11% increase from 2024 and a continuing trend back toward pre-pandemic levels.

Think of voluntary bankruptcy as choosing to press the reset button on your finances rather than waiting for creditors to press it for you.

The Three Main Chapter Options

When you voluntarily file for bankruptcy, you choose which chapter of the Bankruptcy Code to file under based on your financial situation and goals. Each chapter creates a different path through the process.

• Chapter 7 (Liquidation): Non-exempt assets are sold by a court-appointed trustee to pay creditors, after which most remaining unsecured debts are discharged. For most consumers, exemptions protect the family home up to a state-defined amount, one vehicle, household goods, and retirement accounts, leaving little or nothing to liquidate. Chapter 7 cases typically resolve in 3 to 6 months. In 2025, consumer Chapter 7 filings reached 332,706, a 15% increase over 2024.
• Chapter 13 (Reorganization for Individuals): You propose a 3 to 5-year repayment plan that pays back creditors based on your disposable income. At plan completion, remaining eligible debts are discharged. Chapter 13 allows you to keep assets that would be liquidated in Chapter 7, including properties with significant equity. Consumer Chapter 13 filings reached 200,055 in 2025.
• Chapter 11 (Business Reorganization): Companies continue operating while restructuring debts under court supervision. The business files a reorganization plan that creditors vote on, and the court confirms it if it meets specific legal standards. Chapter 11 is resource-intensive and expensive; in 2025, commercial Chapter 11 filings totaled 7,940.

The Automatic Stay: Immediate Protection

The most immediate effect of filing any voluntary bankruptcy is the automatic stay, which takes effect the moment you file and immediately halts nearly all collection activity. Foreclosures stop. Wage garnishments stop. Creditor calls stop. Lawsuits are frozen. Utility shutoffs are temporarily prohibited. The automatic stay is the mechanism that gives the debtor breathing room to organize their affairs and participate in the bankruptcy process without simultaneous harassment from every creditor.

Secured creditors can file a motion for relief from the automatic stay if they can demonstrate that their collateral is declining in value and they are not adequately protected, or that the debtor has no equity in the property and it is not necessary for reorganization. Courts typically grant these motions in Chapter 7 cases for secured loans on vehicles or property where the debtor does not intend to continue payments.

Eligibility Requirements

Chapter 7 filers must pass a means test that compares their income to the median income in their state. If your income exceeds the state median, you must complete a more detailed calculation showing your disposable income is insufficient to support a meaningful Chapter 13 repayment plan. Failing the means test disqualifies you from Chapter 7 and directs you to Chapter 13.

Chapter 13 requires sufficient regular income to fund the proposed repayment plan. There are also debt limits: as of 2025, secured debts must be below approximately $1.39 million and unsecured debts below $465,275 to qualify for Chapter 13. Individuals with higher debt levels must file Chapter 11.

Long-Term Credit Consequences

A Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date. Chapter 13 remains for 7 years. During that time, mortgage lenders typically require waiting periods of 2 to 4 years after discharge before approving new home loans. The practical credit impact diminishes steadily over time as the bankruptcy recedes further into your history and you rebuild a record of on-time payments.

Sources

• https://www.uscourts.gov/data-news/reports/statistical-reports/judicial-business-united-states-courts/judicial-business-2025/us-bankruptcy-courts-judicial-business-2025
• https://www.epiqglobal.com/en-us/resource-center/news/total-bankruptcy-filings-increase-11-in-calendar-year-2025
• https://www.abi.org/newsroom/bankruptcy-statistics
• https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics