Can You Claim Bankruptcy on Credit Card Debt?

Bankruptcy offers a structured legal process for individuals facing overwhelming financial burdens, providing a pathway toward debt relief. Credit card debt is a common form of unsecured debt frequently addressed through bankruptcy proceedings. This legal avenue can help individuals regain financial stability when other solutions prove insufficient.

Key Bankruptcy Types for Credit Card Debt

Two primary forms of consumer bankruptcy, Chapter 7 and Chapter 13, offer distinct approaches to managing credit card debt. Understanding these differences is essential for individuals considering bankruptcy.

Chapter 7, often referred to as liquidation bankruptcy, typically results in the discharge of unsecured debts, including credit card balances, without requiring a repayment plan. In this process, a bankruptcy trustee may liquidate non-exempt assets, if any exist, to distribute proceeds among unsecured creditors. However, many individuals filing Chapter 7 possess only exempt assets, meaning no property is sold.

In contrast, Chapter 13, known as reorganization bankruptcy, involves the development of a court-approved repayment plan spanning three to five years. Credit card debt is incorporated into this plan, with debtors making regular payments to a trustee who then distributes funds to creditors. Any remaining balance on dischargeable credit card debt is typically eliminated upon successful completion of the repayment plan.

Determining Your Eligibility

Eligibility for bankruptcy depends on specific criteria and financial circumstances. For Chapter 7 bankruptcy, individuals must generally pass the “Means Test,” which evaluates whether their income is low enough to qualify for this type of relief. This test compares an individual’s current monthly income to the median income for a household of similar size in their state and calculates disposable income. If an individual’s income exceeds certain thresholds or they have sufficient disposable income, they may be directed to file Chapter 13 instead.

Chapter 13 bankruptcy also has income and debt limits, requiring individuals to demonstrate a regular income source sufficient to fund a repayment plan. For cases filed between April 1, 2025, and March 31, 2028, individuals cannot have more than $1,580,125 in secured debt and $526,700 in unsecured debt to qualify for Chapter 13. Prior to filing for either Chapter 7 or Chapter 13, all individual bankruptcy filers are required to complete a pre-bankruptcy credit counseling course from an approved agency. This mandatory counseling must be completed within 180 days before the bankruptcy petition is filed and typically involves an analysis of the debtor’s financial situation and budget.

Understanding Credit Card Debt Discharge

Most unsecured credit card debt is dischargeable in both Chapter 7 and Chapter 13 bankruptcy. However, several specific exceptions exist where credit card debt may not be discharged, primarily involving instances of fraud or certain recent transactions.

Debts incurred through fraudulent activity, such as making false statements on a credit application or charging with no intent to repay, are typically not dischargeable. Furthermore, specific consumer debts incurred shortly before filing are presumed non-dischargeable. For instance, charges totaling more than $900 for luxury goods or services obtained from a single creditor within 90 days before filing bankruptcy are presumed fraudulent. Luxury goods or services are defined as anything not reasonably necessary for the support or maintenance of the debtor or their dependents. Similarly, cash advances totaling more than $1,250 from a single creditor taken within 70 days before filing are also presumed non-dischargeable. Debts arising from fraud, embezzlement, larceny, or willful and malicious injury are also generally not dischargeable.

Preparing for Bankruptcy Filing

Before initiating the bankruptcy process, individuals must gather financial information and documents. This collection forms the basis of the bankruptcy petition and schedules submitted to the court. Key documents include tax returns for the past several years, with Chapter 13 requiring returns for the four most recent years to be provided to the trustee before the meeting of creditors. Pay stubs or other proof of income, along with recent bank statements, are necessary.

A complete list of all creditors, including credit card companies, with corresponding account statements and amounts owed, must be compiled. Detailed information about all assets, such as real estate, vehicles, bank accounts, investments, and personal property, is required. A thorough accounting of all debts, categorized as secured, unsecured, or priority, is essential. Records of recent financial transactions, including large transfers or payments to creditors, are crucial for completing the petition and schedules accurately.

The Bankruptcy Filing Process

Once information is gathered and the bankruptcy petition and schedules are prepared, the filing process begins. The completed documents are submitted to the bankruptcy court, either electronically or through physical submission. Upon successful filing, an “automatic stay” goes into effect, which is a court order that temporarily halts most collection actions, including those initiated by credit card companies.

The “meeting of creditors,” also known as the 341 meeting, is typically held about a month after filing. During this meeting, the debtor is questioned under oath by the bankruptcy trustee and sometimes by creditors. Following the meeting of creditors, debtors are required to complete a mandatory debtor education course. This course, focusing on personal financial management, helps individuals develop skills to manage their finances responsibly after bankruptcy. The final step is the receipt of the discharge order, which legally releases the debtor from most of their eligible credit card and other dischargeable debts, providing a fresh financial start.