Can You File Bankruptcy On Credit Cards?

When faced with overwhelming credit card debt, many people consider filing for bankruptcy as a way to regain financial stability. Bankruptcy is a legal process designed to provide relief to individuals and businesses unable to meet their debt obligations. The question of whether you can file bankruptcy on credit cards is one that warrants a detailed exploration of the bankruptcy types, their eligibility criteria, advantages, and potential drawbacks. This comprehensive guide will examine the process of filing for bankruptcy on credit card debt, aiming to empower you with the knowledge needed to make informed financial decisions.

Understanding Bankruptcy: An Overview

What is Bankruptcy?

Bankruptcy is a legal process regulated by federal law that helps individuals or businesses eliminate or repay their debt under the protection of the bankruptcy court. It aims to give financially distressed individuals a fresh start.

Types of Bankruptcy for Individuals

There are several types of bankruptcy, but the most relevant for individual consumers dealing with credit card debt are Chapter 7 and Chapter 13.

• Chapter 7 Bankruptcy (Liquidation Bankruptcy): This allows for most unsecured debts, including credit card debt, to be wiped out, giving you a "clean slate." However, it might involve selling non-exempt assets to repay creditors.

• Chapter 13 Bankruptcy (Reorganization Bankruptcy): This type involves creating a repayment plan to pay back all or a portion of your debts over three to five years, allowing you to keep your assets.

Filing Bankruptcy for Credit Card Debt

Eligibility Criteria

Chapter 7 Eligibility

To file for Chapter 7 bankruptcy, you must pass the "means test," which is designed to determine if your income is low enough to qualify. This involves:

1. Comparing Your Income: Your average monthly income over the previous six months is compared to the median income for a household of your size in your state.

2. Passing the Means Test: If your income is below the state median, you're eligible for Chapter 7. If it's above, you may need to file for Chapter 13.

Chapter 13 Eligibility

For Chapter 13, you must have a regular income and your secured debts must be less than $1,257,850, while unsecured debts should be less than $419,275. These amounts are adjusted for inflation every few years.

The Filing Process

1. Credit Counseling: Before filing, you must complete a credit counseling course from an approved provider. This ensures you explore all possible options before resorting to bankruptcy.

2. Filing the Petition: The official process begins with filing a bankruptcy petition and associated forms, detailing your financial information, including assets, income, expenses, debts, and recent financial transactions.

3. Automatic Stay: Once your petition is filed, an automatic stay is issued that stops most creditors from collecting debts, including credit card companies.

4. Trustee Assignment: A bankruptcy trustee is appointed to evaluate your case and facilitate the process.

5. 341 Meeting (Meeting of Creditors): This meeting allows creditors to ask questions about your financial situation. It's managed by the trustee and usually, creditors do not attend.

6. Debt Discharge (Chapter 7) or Repayment Plan Approval (Chapter 13): In Chapter 7, discharge follows soon after the 341 meeting. In Chapter 13, the court must approve your repayment plan.

Potential Outcomes

For Chapter 7

• Discharge of Credit Card Debt: Most credit card debts are discharged unless they involve fraud or recent significant luxury purchases.
• Impact on Credit Score: Bankruptcy can significantly impact your credit score, appearing on your report for up to 10 years.

For Chapter 13

• Debt Repayment: You pay off debts partially or fully through a court-approved plan.
• Asset Retention: Allows you to keep most or all of your assets, making it suitable for those who have valuable non-exempt property they wish to retain.

Advantages and Disadvantages

Advantages of Filing Bankruptcy for Credit Card Debt

• Debt Relief: Offers comprehensive relief from credit card debt.
• Legal Protections: Creditors cannot pursue debts or initiate collections during the automatic stay.
• Fresh Start: Bankruptcy provides a chance to rebuild your financial standing.

Disadvantages

• Credit Impact: Can lower credit scores and impact loan eligibility.
• Public Record: Bankruptcies are public records.
• Cost: Filing can be expensive, considering court fees and attorney costs.
• Asset Risk: Some assets could potentially be sold to repay creditors in Chapter 7.

FAQs about Credit Card Bankruptcy

Can all credit card debt be wiped out in bankruptcy?

Most credit card debts can be discharged in bankruptcy, but debts involving fraud or misuse may not.

What happens to my credit cards during bankruptcy?

When you file, your existing cards are usually canceled. After bankruptcy, you may initially find it challenging to get new credit.

Are there alternatives to bankruptcy for credit card debt?

Yes, options include debt consolidation, negotiation with creditors for lower balances, or consumer credit counseling.

Is there any debt bankruptcy can't erase?

Certain debts, like student loans (in most cases), alimony, child support, and certain tax obligations, aren't dischargeable in bankruptcy.

Exploring Further Resources

For more extensive understanding, websites like Nolo and the United States Courts offer valuable resources on bankruptcy laws and processes. These resources provide additional context and may aid in deciding if bankruptcy is the right choice.

Navigating Your Financial Future

Filing for bankruptcy on credit card debt is a significant financial decision. While it offers relief, it's essential to fully understand the implications and explore all available options. If considering bankruptcy, consulting a qualified bankruptcy attorney can provide guidance tailored to your circumstances and ensure the best financial outcome. As you move forward, focus on rebuilding your credit and stabilizing your financial future, steering clear of the pitfalls that originally led to significant debt accumulation.