You may have credit card debt and wondering whether you can eliminate the credit card debt in bankruptcy. The purpose of this article is to explain how bankruptcy discharge works for credit cards and provide alternate options.
Can You File Bankruptcy On Credit Cards?
The simple answer is, “Yes, you can file bankruptcy on credit cards.” However, filing bankruptcy on credit cards is a bit more complicated. You need to determine if you qualify to file bankruptcy and under what chapter of bankruptcy you are eligible to file. You must also determine if filing bankruptcy is right for you.
Do you qualify for bankruptcy and what are alternatives?
Although bankruptcy discharge can clear out unsecured credit cards, do you qualify? What is the cost? And what is the cost?
Take the free bankruptcy and alternatives calculator below to estimate, personalized to your finances and your zip code.
Some people who owe credit card debt might benefit more from a non-bankruptcy alternative for getting rid of credit card debt. Let’s explore each of the options for getting rid of credit card debt in more detail.
Filing Bankruptcy on Credit Cards
Filing bankruptcy typically gets rid of all credit card debt. Most credit card debt is unsecured debt. Unsecured creditors do not hold a lien on collateral to secure the debt. Therefore, if a creditor wanted to try to collect on credit card debt, the creditor would need to file a debt collection lawsuit, obtain a monetary judgment against you, and petition the court for a wage garnishment order or levy. Not all states permit wage garnishments. Furthermore, most states exempt certain assets from being used to repay judgments. Filing Chapter 7 or Chapter 13 should get rid of credit card debt under most circumstances. However, it that is the only reason you are filing for bankruptcy, you may want to consider non-bankruptcy alternatives to get rid of credit card debt.
Also, if credit card debt is the only debt you owe and your state does not permit wage garnishment, you may want to discuss the matter with a bankruptcy lawyer before filing Chapter 7 or Chapter 13. If the debt is small and the creditor will not be able to enforce a judgment, filing bankruptcy might not be the best option for you. Most bankruptcy lawyers offer free consultations. You can get several legal opinions to help you make the best decision for you. If you have other debts, high credit card debt, your state permits wage garnishments, or you have substantial assets, filing bankruptcy for credit card debt might be the best way to wipe out debts and protect your property.
Are Credit Cards Always Dischargeable in Bankruptcy Court?
There are instances in which credit card debt might not be dischargeable in bankruptcy. For example, if you use your credit card to pay off tax debts, alimony, child support, or other non-dischargeable debts, you cannot discharge that amount of credit card debt. In other words, you cannot transfer non-dischargeable debts to a credit card so that you can get rid of those debts by filing bankruptcy.
Also, recent charges to credit cards are not eligible for a bankruptcy discharge. Charges to your credit cards for luxury items or services of $725 on a single credit card within 90 days before filing bankruptcy are presumed fraudulent. Luxury items and services are things that are not necessary for the support of the debtor or the debtor’s dependents.
Therefore, if the credit card company files an adversary proceeding (lawsuit), the debt may not be dischargeable. The debtor would need to prove he did not commit fraud to get rid of the credit card debt. Likewise, cash advances of $1,000 or more during 70 days before filing bankruptcy are also presumed fraudulent. If the credit card company files an adversary proceeding, the debtor could owe that money even though the debtor filed for bankruptcy relief. It is generally best to stop using all credit cards as soon as you decide to file for bankruptcy relief. If you have had substantial credit card use within the past three months, talk to a bankruptcy lawyer about the timing of your bankruptcy filing.
Debt Consolidation and Debt Settlement to Pay Off Credit Cards
For some people, debt consolidation or debt settlement may be a good way to get rid of credit card debt. However, there are pros and cons of these debt relief options.
One of the most significant disadvantages of debt consolidation is that many people use their home equity to consolidate credit card debts. In a bankruptcy case, the equity in your home is usually protected from being used to repay your unsecured debts. By using your home equity to repay credit cards, you are turning unsecured debts into a secured debt. If you fail to pay the home equity loan payment, you could lose your home.
There are a couple of problems with debt settlement. First, you need enough money to pay lump sum payments to your creditors to settle the debt. Many people use their retirement savings or the proceeds from a debt consolidation loan to negotiate settlements with credit card companies. Like the equity in your home, your retirement savings are protected in bankruptcy. Therefore, you are using funds that you will need to support yourself during your retirement unnecessarily.
Also, the amount that the credit card companies “write off” when you settle the debt is considered income by the Internal Revenue Service. You must report these amounts on your tax returns, which could result in tax debt for that year. Before you consider debt consolidation or debt settlement, read our Ultimate Guide to Credit Card Consolidation and Debt Settlement Guide.
Ascend has developed a method for paying off debt that utilizes some of the best elements from other debt payoff methods. The Savvy Debt Payoff Method utilizes the Savvy Debt Payoff App to help you budget and manage your finances and debts to pay off credit cards without bankruptcy.
Bankruptcy Calculator to help compare your options
Before you file bankruptcy, it is wise to explore all the options to deal with student loans, medical bills, and credit cards. Each debt relief option such as Chapter 7 bankruptcy, Chapter 13 bankruptcy, debt settlement, debt management, and debt payoff planning has different costs, nuances, and pros and cons to consider. The calculator provides the following:
- Estimated all-in cost of Chapter 7, Chapter 13, Debt Settlement, Debt Management, and Debt Payoff Planning.
- Breakdown of what goes into the costs.
- Pros and Cons for each debt relief option
- Options near you for each debt relief option
Ascend provides information about bankruptcy for individuals who are struggling to pay debts they cannot afford to pay. Through our blogs, bankruptcy guides, and bankruptcy articles, we give you information about the various bankruptcy chapters and debt relief options available to you. If you need a bankruptcy lawyer, we can help you find a bankruptcy attorney near you. If you have questions, contact Ascend online or by calling 833-272-3631 to speak with a representative.