Filing for Bankruptcy Due to Credit Card Debt

Facing overwhelming credit card debt can be incredibly stressful, and many individuals consider bankruptcy as a potential solution. Bankruptcy is a legal process designed to help people eliminate or repay their debts under the protection of the bankruptcy court. This guide will provide a comprehensive overview of how to file for bankruptcy specifically for credit card debt, exploring the nuances of the process step-by-step.

Understanding Bankruptcy Types

There are several types of bankruptcy under the U.S. Bankruptcy Code, but the two most relevant for individuals overwhelmed by credit card debt are Chapter 7 and Chapter 13 bankruptcies.

Chapter 7 Bankruptcy

• Objective: To liquidate or wipe out unsecured debts, including credit card debt.
• Process: In Chapter 7, a trustee is appointed to liquidate non-exempt assets and distribute the proceeds to creditors. However, many individuals qualify for exemptions, which means they may keep most, if not all, of their property.
• Eligibility: Qualification is determined by the means test, which compares your income to the median income in your state. If your income is below the median, you automatically qualify.

Chapter 13 Bankruptcy

• Objective: To reorganize and create a manageable repayment plan.
• Process: Instead of liquidating assets, Chapter 13 allows debtors to keep their property and pay back debts over three to five years according to a court-approved plan.
• Eligibility: You must have a regular income to propose a feasible repayment plan, and unsecured debts (like credit card debt) must be below a certain threshold.

Preparing for Bankruptcy

Gathering Financial Information

Before filing, gather detailed information about your financial situation. This includes:

• A list of all your creditors and the amounts owed.
• Your income and expenses.
• A list of all your property and assets.
• Detailed records of your monthly living expenses.

Credit Counseling Requirement

Both Chapter 7 and Chapter 13 filers must complete pre-bankruptcy credit counseling from an approved agency. This counseling helps determine if there are viable alternatives to bankruptcy and must be completed within six months before filing.

Conducting a Means Test

For Chapter 7, the means test compares your average monthly income in the six months before filing against your state's median income for a family of your size. If your income is less, you pass the means test and can file for Chapter 7. If not, Chapter 13 might be the alternative.

The Filing Process

1. Filing the Petition and Schedules

To initiate the bankruptcy process, submit a petition and several forms—known as schedules—to the bankruptcy court. These documents detail your financial status, including assets, liabilities, income, and expenditures.

2. Automatic Stay Order

Upon filing, you will receive an automatic stay, immediately preventing creditors from collecting debts. This includes stopping phone calls, wage garnishments, and foreclosure actions.

3. Appointing a Trustee

A trustee will be appointed to oversee your case. For Chapter 7, the trustee might sell non-exempt assets to pay creditors. For Chapter 13, they review your repayment plan.

4. Creditors’ Meeting

About 20 to 40 days after you file, a 341 meeting (meeting of creditors) will occur. Creditors can question you about your debts and property, though they rarely attend.

5. Completing a Financial Management Course

After filing, attending a debtor education course is mandatory. This course teaches how to manage money more effectively.

6. Discharge or Repayment Plan

For Chapter 7, any qualifying debt gets discharged, relieving you from personal liability. In Chapter 13, the court confirms your repayment plan, allowing you to pay some or all debts over time.

Post-Bankruptcy Considerations

Impact on Credit Score

Bankruptcy will significantly impact your credit score, remaining on your report for up to 10 years. However, it provides a chance to rebuild your credit by responsibly managing debts thereafter.

Rebuilding Credit

• Secure a Secured Credit Card: A secured credit card backed by a deposit helps re-establish credit.
• Monitor Your Credit Report: Ensure all debts are accurately reported as discharged.
• Plan Your Finances: Stick to a budget to avoid future financial distress.

Common Questions and Misconceptions

Does Bankruptcy Clear All Types of Debt?

No, while bankruptcy can discharge many unsecured debts like credit cards and medical bills, certain debts like student loans, child support, and taxes are typically not discharged.

Is My Property Safe in Bankruptcy?

State and federal exemptions exist, allowing you to protect essential properties, such as your primary residence and personal items.

Can I File for Bankruptcy More Than Once?

Yes, but there are time restrictions between filings. Consult legal advice to understand specific situations.

Should I Hire an Attorney?

While not required, hiring an experienced bankruptcy attorney ensures proper navigation and understanding of complex bankruptcy laws, increasing the likelihood of a successful discharge or repayment plan approval.

External Resources

For further assistance and up-to-date information:

• U.S. Courts’ Official Bankruptcy Information: A reliable source for official bankruptcy filing details and court locations.
• National Foundation for Credit Counseling (NFCC): Consider contacting the NFCC for credit counseling needs.

Filing for bankruptcy is a significant decision with lasting implications. Understanding the process fully can help regain financial stability and start anew. Explore more about financial management and budgeting strategies available on our website to guide your post-bankruptcy journey.