Can I File Bankruptcy on Credit Cards?

For many individuals burdened by mounting balances and high interest rates, credit card debt can become an overwhelming financial obstacle. The average credit card balance in the U.S. was approximately $6,295 in 2024, with average interest rates around 22.75% in 2023, illustrating how quickly debt can escalate. When traditional repayment methods prove insufficient, bankruptcy emerges as a legal avenue to address unmanageable debt. This process offers a structured path toward financial relief, potentially providing a fresh start for those struggling to keep up with their obligations.

Understanding Bankruptcy and Credit Card Debt

Bankruptcy provides a legal framework for individuals to resolve overwhelming debt under federal court supervision. Credit card debt is classified as unsecured debt because it is not tied to any collateral, such as a house or car. This distinction is important because unsecured debts are treated differently than secured debts in bankruptcy proceedings.

There are two primary types of personal bankruptcy relevant to consumers seeking relief from credit card debt: Chapter 7 and Chapter 13.

Chapter 7, often referred to as liquidation bankruptcy, involves the sale of non-exempt assets by a court-appointed trustee to pay creditors. After this process, most unsecured debts, including credit card balances, are discharged. The success rate for discharging unsecured debts in Chapter 7 is notably high, around 96.8%.

Chapter 13 bankruptcy, known as reorganization bankruptcy, establishes a repayment plan. Under this plan, individuals make regular payments to creditors over a period, usually three to five years, based on their income and expenses. While not all debts are repaid in Chapter 13, a portion of credit card debt may be repaid through the plan, with any remaining balance discharged upon successful completion. Credit card debt is considered non-priority unsecured debt in Chapter 13, meaning it is often paid after other obligations like child support.

The concept of “dischargeability” is central to how bankruptcy handles credit card debt. Most credit card debt is dischargeable in both Chapter 7 and Chapter 13. However, certain exceptions exist, such as debts incurred through fraud or large purchases of luxury goods or cash advances made shortly before filing.

Qualifying for Bankruptcy

For Chapter 7 bankruptcy, individuals must pass a “means test.” This test compares the filer’s income to the median income for a household of similar size in their state. If the income is below the median, the filer qualifies for Chapter 7.

If the income exceeds the median, the means test further evaluates the filer’s disposable income by subtracting allowed expenses from their income. If significant disposable income remains, indicating an ability to repay some debt, Chapter 7 may not be an option, and Chapter 13 might be more appropriate.

For Chapter 13 bankruptcy, individuals must demonstrate a regular income source to fund the repayment plan. There are also debt limits for Chapter 13. As of 2022, unsecured debts must be less than $465,275 and secured debts less than $1,395,875, though these figures are subject to change.

Before filing for either Chapter 7 or Chapter 13, all filers are required to complete a credit counseling course from an approved agency. This course must be completed within 180 days before filing the bankruptcy petition. The counseling aims to help individuals explore alternatives to bankruptcy and understand the financial implications of the process.

The Bankruptcy Filing Process

The bankruptcy filing process begins with the preparation of a comprehensive petition and various schedules. These documents require detailed disclosure of all assets, liabilities, income, expenses, and financial transactions. This information is then filed with the bankruptcy court.

Upon filing the bankruptcy petition, an “automatic stay” goes into effect. This legal injunction prevents most creditors, including credit card companies, from continuing collection efforts, lawsuits, wage garnishments, and other actions. The automatic stay provides relief from creditor harassment and legal proceedings.

The “Meeting of Creditors,” also known as the 341 meeting, is held. The filer attends, answers questions under oath from the bankruptcy trustee, and sometimes from creditors, regarding their financial situation and the accuracy of their submitted documents.

After the 341 meeting, debtors are required to complete a debtor education course from an approved provider. This course focuses on personal financial management and is a prerequisite for receiving a debt discharge. The final stage involves the discharge of eligible debts, including most credit card balances.

Post-Bankruptcy Financial Landscape

After a bankruptcy discharge, individuals face a period of financial rebuilding, as the bankruptcy filing leaves a significant mark on their credit report.

A Chapter 7 bankruptcy remains on a credit report for 10 years from the filing date, while a Chapter 13 bankruptcy remains for seven years. This presence can initially lower credit scores and make obtaining new credit challenging.

Despite the initial impact, it is possible to begin rebuilding credit relatively soon after discharge. Strategies for credit rebuilding include obtaining a secured credit card, which requires a cash deposit as collateral, or securing a small personal loan. Consistently making on-time payments on these new credit obligations is important for demonstrating financial responsibility.

New credit cards and loans may be available post-bankruptcy, though often with higher interest rates and lower credit limits initially. As a person demonstrates a pattern of timely payments and responsible financial behavior, access to more favorable credit terms improves over time. The focus shifts to establishing a positive payment history and maintaining a low debt-to-income ratio.

Embracing financial discipline and budgeting is important to avoid future debt problems. This includes carefully managing expenses, creating a realistic budget, and building an emergency fund. These habits prevent a return to overwhelming debt and foster long-term financial stability.