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Can You Declare Bankruptcy on Credit Card Debt? A Deep Dive into Debt Relief

Absolutely, you can declare bankruptcy on credit card debt. In fact, credit card debt is one of the most common reasons individuals file for bankruptcy in the United States. Bankruptcy offers a legal pathway to either eliminate (discharge) or reorganize your debts, providing a fresh start when financial burdens become overwhelming. Let’s delve into the intricacies of how bankruptcy works concerning credit card obligations, explore the different types of bankruptcy, and answer some frequently asked questions.

Understanding Bankruptcy and Credit Card Debt

Bankruptcy is a legal process under federal law designed to help individuals and businesses struggling to repay their debts. It’s not a sign of failure, but rather a tool provided by the government to offer relief and a chance at financial rehabilitation. When it comes to credit card debt, bankruptcy can be a powerful option.

Types of Bankruptcy and Credit Card Debt

The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. Understanding the difference is crucial in determining the best course of action for your specific circumstances.

Chapter 7 Bankruptcy: Often referred to as “liquidation bankruptcy,” Chapter 7 involves selling off non-exempt assets to pay creditors. However, most people who file Chapter 7 don’t lose any property because their assets are protected by exemptions. The remaining dischargeable debts, including most credit card debt, are then eliminated. To qualify for Chapter 7, you must pass a means test, which evaluates your income against the median income for your state. If your income is too high, you may need to consider Chapter 13.
Chapter 13 Bankruptcy: Also known as “reorganization bankruptcy,” Chapter 13 involves creating a repayment plan, typically lasting three to five years, to pay off a portion of your debts. While you’ll still be making payments, it can be a much more manageable solution than dealing with overwhelming credit card debt directly. At the end of the repayment plan, any remaining dischargeable debts are eliminated. Chapter 13 is often a viable option for individuals with regular income who don’t qualify for Chapter 7.

Credit Card Debt That May Not Be Dischargeable

While most credit card debt is dischargeable in bankruptcy, there are exceptions. Debt incurred through fraudulent means or with the intent to avoid repayment may not be discharged.

Fraudulent Charges: If you racked up significant credit card debt knowing you couldn’t repay it, especially shortly before filing for bankruptcy, a creditor might argue that the debt was incurred fraudulently. They could then file an adversary proceeding to prevent that specific debt from being discharged.
Cash Advances: Similarly, large cash advances taken out shortly before filing bankruptcy can raise red flags and may be challenged by creditors.
Luxury Purchases: Extravagant or luxury goods bought on credit shortly before filing for bankruptcy can also be scrutinized. Creditors might argue that these purchases were made with no intention of repayment.

The Bankruptcy Process and Credit Card Debt

The bankruptcy process, regardless of whether you choose Chapter 7 or Chapter 13, involves several key steps.

Credit Counseling: You are required to complete credit counseling with an approved agency before filing for bankruptcy.
Filing the Petition: You must file a petition with the bankruptcy court, including detailed information about your assets, liabilities, income, and expenses.
Automatic Stay: Once you file, an automatic stay goes into effect, which immediately stops most collection actions, including lawsuits, wage garnishments, and harassing phone calls from creditors.
Meeting of Creditors (341 Meeting): You will attend a meeting with your creditors, where they can ask you questions about your financial situation.
Chapter 7: In Chapter 7, the trustee appointed by the court will review your assets and determine if any are non-exempt and can be sold to pay creditors. If not, and you’ve met all the requirements, you’ll receive a discharge, eliminating your eligible credit card debt.
Chapter 13: In Chapter 13, you’ll propose a repayment plan to the court. If the plan is approved, you’ll make regular payments for three to five years. After completing the plan, any remaining dischargeable debt, including eligible credit card debt, will be discharged.

Frequently Asked Questions (FAQs) About Bankruptcy and Credit Card Debt

Here are some frequently asked questions to further clarify the relationship between bankruptcy and credit card debt.

1. Will Filing Bankruptcy Erase All My Credit Card Debt?

Generally, yes. Credit card debt is typically dischargeable in both Chapter 7 and Chapter 13 bankruptcy. However, as mentioned earlier, certain types of credit card debt, such as those incurred through fraud or large cash advances taken out shortly before filing, may not be dischargeable.

2. How Long Does Bankruptcy Stay on My Credit Report?

A Chapter 7 bankruptcy will remain on your credit report for 10 years, while a Chapter 13 bankruptcy will remain for 7 years from the filing date. While this may seem like a long time, it’s often possible to rebuild your credit score much sooner.

3. Can a Creditor Sue Me After I File for Bankruptcy?

No. The automatic stay that goes into effect upon filing bankruptcy prevents creditors from taking any collection actions against you, including lawsuits, wage garnishments, and phone calls. If a creditor violates the automatic stay, you may be able to take legal action against them.

4. What Happens to Joint Credit Card Accounts When One Person Files Bankruptcy?

If you have a joint credit card account and only one person files for bankruptcy, the other person remains responsible for the entire debt. The bankruptcy only discharges the debt for the filer.

5. Can I Keep My Credit Cards After Bankruptcy?

In most cases, your existing credit cards will be closed when you file for bankruptcy. After the bankruptcy is discharged, you can start rebuilding your credit and eventually obtain new credit cards.

6. Will I Be Able to Get Credit Cards After Bankruptcy?

Yes, you can. It might be challenging initially, but secured credit cards, which require a security deposit, are a great way to start rebuilding your credit. Responsible use of these cards can help improve your credit score over time.

7. Is There a Limit to How Much Credit Card Debt I Can Discharge in Bankruptcy?

There is no specific dollar limit on the amount of dischargeable credit card debt in bankruptcy. The key factor is whether the debt is dischargeable under the rules of bankruptcy.

8. What If I Used My Credit Card for Medical Expenses?

Medical expenses charged to a credit card are treated the same as any other credit card debt in bankruptcy. They are generally dischargeable, subject to the same rules regarding fraud and intent.

9. Can I Choose Which Credit Card Debts to Discharge in Bankruptcy?

No, you cannot selectively discharge debts in bankruptcy. If you file for bankruptcy, all eligible debts, including credit card debt, are generally discharged.

10. What Are the Alternatives to Bankruptcy for Dealing with Credit Card Debt?

Alternatives to bankruptcy include debt management plans through credit counseling agencies, debt consolidation loans, and debt settlement. However, these options may not be suitable for everyone, especially those with significant credit card debt and limited income.

11. How Much Does It Cost to File for Bankruptcy?

The cost of filing for bankruptcy varies depending on the type of bankruptcy (Chapter 7 or Chapter 13) and the attorney fees involved. Court filing fees are also required. You should consult with a bankruptcy attorney to get an estimate of the total cost.

12. Should I Hire an Attorney to File for Bankruptcy?

While it’s not legally required, hiring a bankruptcy attorney is highly recommended. An attorney can provide valuable guidance throughout the process, ensure that all paperwork is properly completed, and represent your interests in court. They can also help you determine whether bankruptcy is the right option for you and which type of bankruptcy is most suitable for your situation.

Conclusion: Making an Informed Decision About Credit Card Debt and Bankruptcy

Declaring bankruptcy on credit card debt is a significant decision. It’s crucial to understand the process, the potential consequences, and the alternatives before proceeding. Consulting with a qualified bankruptcy attorney and a credit counselor can help you make an informed decision and take the best course of action for your financial future. While bankruptcy can have a negative impact on your credit score in the short term, it can provide a path to financial freedom and a fresh start. Remember, it is a tool to be used judiciously, and with proper planning, you can navigate the process and rebuild your financial life.