Credit Card Debt in Bankruptcy

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What Happens to Credit Card Debt in Bankruptcy?

Spending beyond the budget is a common occurrence, thanks to the ever-prevailing credit cards. Since you do not have to pay immediately, people often go overboard with their spending, not realizing that eventually the money is to be paid and that too with additional charges. It is no wonder that a large number of population incurs heavy debt thanks to this habit, resulting in many of the individuals filing for bankruptcy. The excessive debt may also be due to exhaustive medical bills or vehicle repairs etc. Many times, credit card debts are discharged (with some exceptions) when a person is able to successfully complete a Chapter 13 or Chapter 7 bankruptcy.

According to Sacramento based law firm Recovery Law Group individuals can file for bankruptcy under Chapter 7 or Chapter 13. The procedure of getting credit card debt discharged is different in each case. Let’s take a look at what happens to credit card debt in both cases:

Chapter 7 Bankruptcy

Filing for bankruptcy under chapter 7 will get most of your debt discharged but you will be required to give up all your non-exempt property. The property is sold by the bankruptcy trustee and the money received is used to pay off the creditors. Unlike child support and taxes, which are priority debts, most credit card debts are regarded as non-priority and unsecured debts. Unlike priority debts which cannot be discharged, credit card debts are discharged with chapter 7. It is possible for an individual to file for bankruptcy under chapter 7 and endorse all debts except credit card debt. In this case, the bankruptcy filer is liable for the endorsed debts after the bankruptcy is finished.

Chapter 13 Bankruptcy

If your situation permits, bankruptcy under chapter 13 might suit you well. During this type of bankruptcy, you are required to make partial or full payments to some creditors. A specialized repayment plan is drafted, wherein you are required to make payments within 3-5 years period. In the majority of the cases, a portion of the unsecured debt (such as credit card) is paid in this type of bankruptcy. The repayment amount depends on a number of factors including your disposable income, repayment amount, unsecured debts, etc. Most of the individuals filing for bankruptcy under this chapter only need to pay for a small percentage of their unsecured debts. After the repayment period is over, the remaining credit card dues are discharged.

Can Creditors Challenge Your Credit Card Debt Discharge?

Despite the court ordering for the discharge of your credit card debts, sometimes, the creditors may challenge it. If the credit card debt is incurred by a person due to fraudulent activities, then the debt cannot be discharged. If an individual is involved in any of such activities:

  • Providing false information/statement on credit card application.
  • Making heavy purchases of over $650 in luxury services or goods within 90 days before filing for bankruptcy, gives an impression of fraudulent activity (prior intention of filing for bankruptcy)
  • Taking a cash advance totaling more than $925 within 70 days of filing for bankruptcy.

If any of the above is found true, the creditor can challenge the debt discharge process. In case they win the appeal, the court can make it mandatory for the individual to pay the credit card debt. Sometimes, however, some creditors take a security interest in the property. In such circumstances, the credit card debt becomes a secured debt, which means, the debtor has to pay it off.

It is important to remember that once you file for bankruptcy, creditors cannot take you to court and also not make attempts for debt collection. The automatic stay prevents credit card companies and debt collection agencies from contacting you through any means such as telephone, letters.