Can I File for Bankruptcy to Erase My Credit Card Debt?

While credit cards make it easy to buy what you need and allow you to pay for big purchases over time, your credit card debt can add up quickly if you aren’t careful. Consumer credit cards often have extremely high interest rates, and many people find themselves unable to pay down their credit card debt because their interest rates are so high.

Even though the credit card systems put this never-ending cycle in place, they aren’t sympathetic to their cardholders’ inability to pay. Credit card companies won’t offer to reduce your debt or your interest rate voluntarily. They will keep making you pay, and if you don’t pay, they won’t hesitate to initiate aggressive collection actions that only add to your daily stress.

Eliminating Credit Card Debt Through a Chapter 7 or Chapter 13 Bankruptcy

Fortunately, it is often possible to eliminate consumer credit card debt through the bankruptcy process. In most cases, credit card debt is “unsecured.” This means that there isn’t any property attached to the debt that you owe. While your mortgage company can foreclose on your home if you don’t pay (although it is often possible to keep your home after filing for bankruptcy as well), your credit card company doesn’t have access to your purchases or anything else you own—in most cases.

Importantly, there are some exceptions. With certain types of credit cards, you agree to take on “secured” debt under the terms of your credit agreement. Of course, this isn’t something the company is likely to tell you—and it isn’t something you are likely to know unless you read through the fine print before you sign. This is common with store credit cards, such as when you obtain a credit card to purchase a mattress, home electronic or other high-value item.

Credit Card Debt in Chapter 7 Bankruptcies

With unsecured credit card debt, it is relatively easy to eliminate your debt in a Chapter 7 bankruptcy. Unsecured creditors receive the least protection during the bankruptcy process. Once you pay your secured creditors by liquidating your non-exempt assets, any remaining assets in your bankruptcy estate are then made available to your unsecured creditors (i.e., the credit card companies). Regardless of whether these creditors receive any payment through the liquidation process, once your Chapter 7 bankruptcy is complete, your unsecured credit card debt will be eliminated.

If you have any secured credit card debt, the company might be able to seek to take the secured property back during your Chapter 7 bankruptcy. However, there are limits, and your lawyer may be able to help you “redeem” any secured property that you want to keep. This involves using other assets to pay the credit card company, and, once your secured debt is satisfied, you are no longer at risk for repossession or foreclosure.

While these are the general rules, as always, there are some exceptions. For example, if you recently purchased luxury items or took out a cash advance with your credit card, you might not be able to eliminate this portion of your unsecured credit card debt through a Chapter 7 filing. Your bankruptcy lawyer can help you understand which exceptions apply (if any), and your lawyer can help you make smart decisions focused on maximizing the benefits of the bankruptcy process.

Credit Card Debt in Chapter 13 Bankruptcies

Filing for bankruptcy Under Chapter 13 has different consequences from filing under Chapter 7. In a Chapter 13 bankruptcy, the focus is on “reorganizing” your debts so that you can pay them off over time (at least to an extent) rather than liquidating your non-exempt assets to pay what you can all at once.

A Chapter 13 payment plan typically lasts three to five years. During the bankruptcy process, your lawyer will help you develop a manageable payment plan to submit to the court for approval. Once the court approves, you will have to make the payments every month until your plan ends. If you do this, then any remaining debts covered under the plan will be eliminated. This can include both unsecured and secured credit card debts.

Chapter 7 or Chapter 13—Which Option Should You Choose When You Have Credit Card Debt?

If you have unmanageable credit card debt, should you file for bankruptcy under Chapter 7 or Chapter 13? Ultimately, the answer depends on your individual circumstances.

Initially, many people are drawn to Chapter 7 because it provides the opportunity to eliminate debts—including credit card debt—right away. And, for many people, filing under Chapter 7 is the right choice. However, since Chapter 7 is less advantageous for creditors, it also generally has greater long-term consequences. A Chapter 7 filing stays on your credit report for 10 years (as opposed to seven years with a Chapter 13 filing), and lenders may be less willing to extend credit to you after you file under Chapter 7. Chapter 7 has eligibility restrictions as well.

While filing under Chapter 13 can allow you to move on from your bankruptcy sooner, you need to be confident in your ability to make the payments under your “reorganized” payment plan. If you can’t, you could find yourself back in financial trouble. But, as we just discussed, there are benefits to filing under Chapter 13 as compared to filing under Chapter 7, and if you aren’t eligible to file under Chapter 7, a Chapter 13 filing may be your only bankruptcy option.

When considering your options, it is important not to overlook the alternatives to bankruptcy. An experienced bankruptcy lawyer will help you explore all of your options and choose the one that is best for you and your family.

Request a Free Consultation with Bankruptcy Lawyer Georgette Miller

If you would like to know more about your options for erasing your credit card debt, we invite you to get in touch. To request a free and confidential consultation with bankruptcy lawyer Georgette Miller, please call 866-964-6529 or tell us how we can reach you online today.