Credit Card Debt and Bankruptcy

If money is tight, you may get in the habit of using your credit card as a back up. This isn’t a problem if you pay off the balance each month, but the balance can grow quickly and your credit card can become another bill that’s impossible to keep up with. Bankruptcy may be a solution to your debt problems, but it’s a good idea to familiarize yourself with the process and what it means for your debt.

Chapter 7

If you pass the Means Test, you are eligible to file a Chapter 7 bankruptcy, which is the easiest way to discharge credit card debt. Most Chapter 7 bankruptcies are considered “no asset” cases. This means that you do not have any property that can be sold to repay creditors. If you do have assets that the court can take, they will be sold and your creditors will be repaid in order of priority. Credit cards and most unsecured debts are considered “non-priority” claims. Other creditors will be paid first, and additional profits will be split between all unsecured creditors equally. In most cases, your credit card company will most likely not receive anything.

If you have committed any type of credit card fraud, that amount will not be discharged. There are two primary forms of fraud related to credit cards and bankruptcy. If you purchased luxury goods right before filing, those amounts cannot be included in your bankruptcy. Luxury goods are anything other than basic living necessities, such as food, clothing, gasoline, and utilities. Any cash advances taken out within 70 days of filing, no matter what money is used on, will not be included in the discharge. To be safe, it’s best to stop using your credit cards as soon as you realize you may need to file bankruptcy.

Chapter 13

A Chapter 13 is a reorganization of your debt with a reduced payment plan to pay back your creditors. Some types of debts must be paid off completely, while others are discharged after just a small fraction of the balance is paid.

There are three different classes of debts:

  • Secured – [LINK secured vs. unsecured] This includes your mortgage and car payments. If you want to keep your property, you need to keep up with payments and pay them off completely.
  • Priority unsecured – This includes child support, alimony, and most kinds of taxes. These must be paid in full in a Chapter 13, and also cannot be discharged in a Chapter 7.
  • General unsecured – This includes credit cards. These non-priority debts are usually not paid completely.

When creating your repayment plan, you need to make sure you can pay your secured and priority unsecured debts each month, plus what you can afford toward general unsecured. Sometimes this means you are unable to pay much toward credit cards. We’ll work together to propose a repayment plan that will need to be approved by the court trustee. At the end of your 3-5 year repayment plan, the remainder of your credit card debt will be discharged.

Take Action

 If you’re in credit card debt over your head, bankruptcy might be the best way to put that debt behind you. Give me a call so we can discuss your situation and come up with a customized plan for you.