Can You Declare Bankruptcy on Credit Card Debt?

It is possible to declare bankruptcy on credit card debt. Bankruptcy offers a legal framework for individuals facing significant financial hardship to manage or eliminate overwhelming debt, including unsecured obligations like credit card balances. This process provides a path for debtors to obtain a fresh financial start, often by liquidating assets or reorganizing finances. Understanding the different forms of bankruptcy is important. The specific outcome for credit card debt depends on the type of bankruptcy filed and the individual’s financial circumstances.

Types of Bankruptcy for Individuals

Individuals primarily consider two types of bankruptcy under federal law: Chapter 7 and Chapter 13. Each chapter addresses debt differently, offering distinct pathways for relief. The choice depends on income, assets, and debt nature.

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves selling certain non-exempt assets to pay creditors. This process typically provides a quicker resolution, often completing within three to six months. Chapter 7 allows for the discharge of qualifying unsecured debts without a repayment plan.

Conversely, Chapter 13 bankruptcy, known as reorganization bankruptcy, involves a court-approved repayment plan. Debtors propose a plan to repay some or all of their debts over a period of three to five years, using their disposable income. This chapter is suitable for individuals with a regular income who wish to keep assets, such as a home or car, which might otherwise be at risk in a Chapter 7 filing.

Eligibility Requirements for Bankruptcy

Eligibility for bankruptcy depends on several factors, including income, prior bankruptcy filings, and completion of specific courses. Meeting these criteria is a prerequisite before an individual can file a bankruptcy petition.

For Chapter 7, filers must generally pass a “means test,” which assesses their income against the median income for a household of their size in their state. If the income is below the median, they typically qualify. If it is above, the test further analyzes their disposable income after accounting for allowed expenses, determining if they have sufficient funds to repay a portion of their unsecured debts.

Before filing, all individuals must complete a credit counseling course from an approved agency within 180 days of filing. This course helps evaluate financial options and develop a personal budget. Following the filing, a debtor education course is also required before debts can be discharged, aiming to provide financial management skills.

General requirements include residency, meaning the debtor must have lived in the state where they are filing for the greater part of the 180 days preceding the filing. There are also restrictions on filing if a previous bankruptcy was discharged within a certain timeframe, typically eight years for Chapter 7 or two years for Chapter 13.

Discharging Credit Card Debt in Bankruptcy

Credit card debt is generally considered unsecured debt, meaning it is not tied to specific collateral like a home or car. This impacts how it is treated in bankruptcy. The discharge of credit card debt is a primary reason individuals file for bankruptcy.

In Chapter 7 bankruptcy, credit card debt is typically discharged, meaning the debtor is no longer obligated to repay it. Once the bankruptcy case concludes, the court issues a discharge order, eliminating most unsecured debts. This process provides a swift resolution, often within a few months. The discharge applies to all eligible credit card accounts held by the debtor at the time of filing.

For Chapter 13 bankruptcy, credit card debt is included in the court-approved repayment plan. The debtor makes regular payments to a bankruptcy trustee, who then distributes funds to creditors, including credit card companies, over a period of three to five years. The amount paid to credit card creditors depends on the debtor’s income, expenses, and the total amount of their debts. Often, credit card companies receive only a fraction of what they are owed.

Upon successful completion of the Chapter 13 repayment plan, any remaining balance on eligible credit card debts is discharged. This means that even if the plan did not pay off the entire credit card balance, the debtor is no longer responsible for the remainder. This offers a structured approach to debt resolution.

Debts Not Discharged in Bankruptcy

While bankruptcy can provide substantial relief from many types of debt, certain obligations are typically not dischargeable. These exceptions ensure certain public policy interests are upheld.

Common examples of non-dischargeable debts include most student loans, which are rarely discharged unless the debtor can prove undue hardship. Domestic support obligations, such as child support and alimony, are also not dischargeable.

Certain tax debts, particularly recent income taxes or trust fund taxes, are generally not dischargeable. For income taxes, there are specific rules regarding the age of the tax debt, when the tax return was due, and when it was filed. Debts incurred through fraud, misrepresentation, or defalcation while acting in a fiduciary capacity are also typically not discharged. This includes debts where the debtor obtained money, property, or services by false pretenses or actual fraud.

Additionally, debts for willful and malicious injury caused by the debtor to another person or their property are usually not discharged. Court fines, penalties, and criminal restitution orders are also generally exempt from discharge.

The Bankruptcy Filing Process

The bankruptcy filing process begins after an individual has assessed their eligibility and gathered all necessary financial documentation. This journey involves several distinct stages, each with specific requirements.

The initial step involves preparing and filing the bankruptcy petition along with various schedules and statements with the bankruptcy court. These documents provide an overview of the debtor’s assets, liabilities, income, expenses, and financial history. Upon filing, an “automatic stay” immediately goes into effect, which temporarily halts most collection activities by creditors, including lawsuits, wage garnishments, and repossessions.

Approximately 20 to 40 days after the petition is filed, the debtor must attend a “meeting of creditors,” also known as the 341 meeting. During this meeting, the bankruptcy trustee and any creditors who choose to attend can ask the debtor questions under oath about their financial affairs and the information provided in their bankruptcy documents. This meeting is typically brief.

Following the meeting of creditors and the completion of the mandatory debtor education course, if all requirements are met and no objections are raised, the court will issue a discharge order. The entire process, from filing to discharge, can take approximately four to six months for Chapter 7 and three to five years for Chapter 13.