Can Credit Card Debt Be Discharged in Bankruptcy?

For individuals facing overwhelming credit card debt, bankruptcy can offer financial relief. Understanding how credit card debt is treated within the bankruptcy system is important. While credit card debt is often dischargeable in bankruptcy, specific conditions and processes determine eligibility and the ultimate outcome.

Types of Bankruptcy and Credit Card Debt

Bankruptcy provides a legal framework for individuals to address their debts, offering different pathways depending on their financial situation. A key outcome is a “discharge,” which legally releases a debtor from personal liability for certain obligations. After a discharge, creditors are permanently prohibited from pursuing collection actions on those debts.

Chapter 7 bankruptcy, often called liquidation bankruptcy, is for individuals with limited income who cannot repay their debts. In a Chapter 7 case, a court-appointed trustee gathers and sells any non-exempt assets, using the proceeds to pay creditors. Credit card debt is generally considered unsecured, non-priority debt, meaning it is not backed by collateral and typically receives a lower priority for repayment. Consequently, most credit card debt is dischargeable in Chapter 7, providing a quick financial fresh start, often within a few months.

Chapter 13 bankruptcy, known as reorganization bankruptcy, is suitable for individuals with a regular income who can afford to repay some of their debts over time. Under Chapter 13, debtors propose a repayment plan, typically spanning three to five years, during which they make regular payments to a trustee. Unsecured debts, including credit card balances, are incorporated into this plan, and debtors usually pay only a portion of what they owe. Upon successful completion of the court-approved repayment plan, any remaining credit card debt is discharged.

Circumstances Preventing Discharge

While bankruptcy can offer significant relief from credit card debt, certain circumstances can prevent its discharge. Debts incurred through fraudulent activity are generally not dischargeable. This includes situations where a debtor makes large purchases or obtains cash advances shortly before filing for bankruptcy with no genuine intent to repay the funds.

The law includes “presumptions of fraud” to address such behavior, making it easier for creditors to challenge dischargeability. For instance, credit card purchases for luxury goods or services totaling more than $900 from a single creditor within 90 days before filing for bankruptcy are presumed to be fraudulent. Similarly, cash advances exceeding $1,250 from a single creditor within 70 days before filing are also presumed to be fraudulent. Luxury goods or services are broadly defined as anything not reasonably necessary for the support or maintenance of the debtor or their dependents. While these presumptions exist, debtors can present evidence to demonstrate they genuinely intended to repay the debt when incurred.

Other types of debt are also typically non-dischargeable and distinct from credit card obligations. These can include most student loans, child support, alimony, and certain tax debts. Creditors who believe a debt should not be discharged can initiate an “adversary proceeding,” which is essentially a lawsuit within the bankruptcy case. This legal action allows the creditor to present their case, often alleging fraud, to the bankruptcy court to prevent the discharge of a specific debt.

Steps Towards Discharging Credit Card Debt

The process of discharging credit card debt through bankruptcy involves several procedural steps, beginning even before the official filing. Individuals considering bankruptcy are generally required to complete an approved credit counseling course from a certified agency within 180 days before filing their petition. This course aims to provide an overview of managing finances and exploring alternatives to bankruptcy.

After completing credit counseling, the next step involves filing the bankruptcy petition and other required documents with the court. The “341 Meeting of Creditors” is typically scheduled between 20 and 60 days after the petition is filed. During this meeting, the debtor appears under oath to answer questions from the bankruptcy trustee and, sometimes, from creditors about their financial affairs, assets, and debts.

Following the 341 Meeting and before a discharge can be granted, debtors are generally required to complete a second educational component: a debtor education course. This course focuses on personal financial management and budgeting skills. Once all requirements are met and the bankruptcy case progresses, the court issues a discharge order. This official court order legally releases the debtor from personal liability for eligible credit card debts, prohibiting creditors from attempting to collect them. The timing of this discharge varies, with Chapter 7 cases typically concluding within three to six months, while Chapter 13 discharges occur after the successful completion of the three-to-five-year repayment plan.