Can You File Bankruptcy on Credit Cards?

Bankruptcy provides a legal pathway for individuals grappling with overwhelming debt to achieve financial relief. It offers a structured approach to address various types of unsecured obligations, including credit card debt. This process allows individuals to reorganize their finances or eliminate certain debts, providing an opportunity for a fresh financial start.

Discharging Credit Card Debt

Credit card debt is unsecured, meaning it is not tied to collateral. This often makes it eligible for discharge in personal bankruptcy proceedings, which eliminates a debtor’s legal obligation to repay certain debts and prevents creditors from pursuing further collection.

Two primary types of consumer bankruptcy address credit card debt: Chapter 7 and Chapter 13. Chapter 7, or liquidation bankruptcy, typically eliminates most unsecured debts, including credit card balances. A trustee manages the case, and while non-exempt assets may be sold, credit card debt is often discharged without significant repayment. Eligibility for Chapter 7 depends on meeting specific criteria, including a means test.

Chapter 13, or reorganization bankruptcy, establishes a repayment plan over three to five years. Credit card debts are included in this plan, often at a reduced rate, as they are non-priority unsecured debt. Debtors make regular payments to a trustee, and upon completion, any remaining unsecured credit card debt is typically discharged. This approach allows individuals with regular income to manage debts while potentially retaining property.

Despite general dischargeability, exceptions exist for credit card debt. Charges for luxury goods or services incurred shortly before filing may not be discharged. Purchases totaling more than $725 for luxury items made within 90 days before filing are presumed non-dischargeable. Luxury goods are defined as items not reasonably necessary for the debtor’s or their dependents’ support.

Cash advances taken close to the bankruptcy filing date can also face scrutiny. Those over $1,000 obtained within 70 days before filing are generally presumed non-dischargeable. This prevents individuals from incurring significant debt with no intention of repayment just before seeking protection. Debts obtained through fraud or misrepresentation, such as lying on a credit application, are also typically not discharged. Creditors believing fraud occurred may challenge the discharge by filing a complaint with the court.

Pre-Filing Requirements

Before initiating a bankruptcy case, individuals must complete several mandatory steps and gather financial documentation. One requirement is pre-bankruptcy credit counseling from a U.S. Trustee Program-approved agency. This session helps individuals explore alternatives to bankruptcy and understand their financial situation. Its purpose is to ensure bankruptcy is a necessary step, not merely a convenient option.

Upon completion, a certificate is issued and must be filed with the bankruptcy petition. This certificate remains valid for 180 days, meaning the petition must be filed within that timeframe. Failure to complete this counseling or file the certificate can lead to dismissal of the case.

For Chapter 7 bankruptcy, a “means test” is often required to determine eligibility. This test assesses if a debtor’s income is low enough to qualify, preventing higher-earning individuals from liquidating debts without repayment. The means test compares the debtor’s current monthly income over the six months prior to filing against the median income for a similar household size in their state. If income is below the state median, the individual generally passes the first part of the test.

If income exceeds the state median, the second part of the means test involves deducting allowed expenses from the debtor’s income to calculate disposable income. These expenses are based on IRS national and local standards, along with some actual expenses. If remaining disposable income is too high, indicating an ability to repay some debt, Chapter 7 may be deemed presumptively abusive, and Chapter 13 might be more appropriate.

Gathering necessary financial documentation is an important preparatory step. This includes recent pay stubs, typically for the last six months, and tax returns for the previous two years. Bank statements for the past three to six months are also required, allowing the trustee to review transactions for undisclosed assets or unusual payments. Other documents include statements for all creditors, loan statements, and proof of property values. Accurate and complete documentation is essential for a smooth bankruptcy process and to verify information in the petition.

The Bankruptcy Petition Process

Once pre-filing requirements are met and financial documents compiled, the next step is filing the bankruptcy petition with the federal bankruptcy court. This comprehensive form details the debtor’s financial situation, including assets, liabilities, income, and expenses. It initiates the legal process and informs creditors that the individual has sought protection under bankruptcy law.

Upon filing, an “automatic stay” goes into effect, immediately halting most collection efforts by creditors, including phone calls, lawsuits, and wage garnishments. This provides immediate relief from creditor pressure while proceedings unfold. The court then notifies all listed creditors of the filing.

A mandatory event is the “meeting of creditors,” also known as the 341 meeting. This meeting is conducted by a bankruptcy trustee, not a judge. The debtor must attend and answer questions under oath about their financial affairs, property, debts, and income. Creditors are invited to attend and may ask questions, though their presence is not common. The meeting serves to confirm the accuracy of the submitted paperwork.

After the bankruptcy petition is filed, and before debts can be discharged, debtors are required to complete a post-filing financial management course, also known as debtor education. This course is separate from pre-filing credit counseling and focuses on budgeting, responsible credit use, and rebuilding financial stability. Like credit counseling, this course must be taken from an approved provider. Completion of this course is a prerequisite for receiving a bankruptcy discharge.