Can You File Bankruptcy on Just Credit Cards?

Understanding Credit Card Debt in Bankruptcy

Bankruptcy offers a legal pathway for individuals to manage overwhelming financial obligations. Credit card debt often represents a significant portion of the unsecured liabilities addressed in such proceedings. Unsecured debt refers to any financial obligation not backed by collateral, meaning there is no specific asset a creditor can seize if payments are not made. Credit card balances, medical bills, and personal loans are common examples of unsecured debts.

When considering bankruptcy, the process addresses all of an individual’s debts, not just credit cards. You cannot selectively file bankruptcy on only credit card balances. All financial obligations, whether secured or unsecured, must be disclosed and included in the bankruptcy petition. This comprehensive approach ensures a complete financial reorganization or liquidation.

Two primary types of consumer bankruptcy, Chapter 7 and Chapter 13, address credit card debt. Chapter 7 bankruptcy, often called liquidation bankruptcy, is typically chosen by individuals seeking to eliminate unsecured debts. In a Chapter 7 filing, most credit card balances are discharged, meaning the debtor is no longer legally responsible for repayment. This process can provide a fresh financial start by eliminating eligible unsecured obligations.

Chapter 13 bankruptcy, known as reorganization bankruptcy, handles credit card debt differently. Balances are incorporated into a court-approved repayment plan, typically spanning three to five years. Debtors make regular payments to a bankruptcy trustee, who then distributes funds to creditors. Unsecured debts, including credit card debt, are usually a lower priority in Chapter 13 plans, often receiving only a fraction of the original amount owed. Upon successful completion of the repayment plan, any remaining eligible credit card debt is discharged.

The treatment of credit card debt within both Chapter 7 and Chapter 13 emphasizes its unsecured nature. Chapter 7 aims for a swift elimination of such debts for eligible individuals. Chapter 13 provides a structured path for repayment over time, with the goal of discharging any remaining unsecured balances. The suitability of either chapter depends on an individual’s financial circumstances, including income, assets, and overall debt load.

Determining Eligibility for Bankruptcy

Before filing for bankruptcy, individuals must meet specific eligibility requirements, which vary by chapter. For Chapter 7, a primary qualification involves passing the “means test.” This test compares an applicant’s average monthly income over the past six months to the median income for a comparable household size in their state. If their income falls below this median, they typically qualify for Chapter 7.

If an individual’s income exceeds the state’s median, they may still qualify for Chapter 7. A more detailed means test calculation analyzes their disposable income after deducting certain allowed expenses, such as housing, transportation, and medical costs. If the calculated disposable income is low enough, indicating an inability to repay unsecured debts, the individual may still be eligible.

All individual bankruptcy filers must complete a credit counseling course from an approved agency within 180 days before filing their petition. This pre-filing counseling explores alternatives to bankruptcy and helps individuals assess their financial situation. A certificate of completion must be filed with the bankruptcy court, as failure to do so can result in case dismissal.

A mandatory debtor education course, also known as a personal financial management course, must be completed after filing but before debts can be discharged. This course focuses on practical financial management skills, including budgeting and responsible credit use. Both courses must be obtained from providers approved by the U.S. Trustee Program.

Restrictions exist concerning prior bankruptcy filings, influencing when an individual can seek another discharge. If a debtor received a Chapter 7 discharge, they must wait eight years from the filing date of the previous case to be eligible for another Chapter 7 discharge. For those who previously filed Chapter 13 and received a discharge, the waiting period to file Chapter 7 is six years from the Chapter 13 filing date.

If an individual received a Chapter 7 discharge and now wishes to file Chapter 13, they must wait four years from the Chapter 7 filing date. If the previous filing was a Chapter 13, they may file another Chapter 13 after two years from the initial filing date. These waiting periods determine eligibility and the type of bankruptcy relief available.

For Chapter 13 bankruptcy, there is no means test like Chapter 7. However, individuals must demonstrate a regular income source to fund a repayment plan. This income can stem from wages, self-employment, social security, or other regular payments. Chapter 13 also has specific debt limits; unsecured debts must be less than approximately $526,700 and secured debts less than approximately $1,580,125 to qualify.

Individuals considering Chapter 13 must also ensure they have filed all required tax returns for the four years preceding their bankruptcy filing. Meeting these income, debt, and tax compliance requirements is essential for a Chapter 13 petition to proceed.

The Bankruptcy Petition and Court Process

The formal court process begins with preparing and filing the bankruptcy petition. This petition is a comprehensive document providing the court with a complete overview of the debtor’s financial situation. It includes detailed schedules listing all assets, liabilities, income, and expenses, along with a statement of financial affairs. Debtors must gather various documents, such as tax returns, pay stubs, bank statements, and creditor information, to ensure accuracy.

Upon filing the bankruptcy petition, an automatic stay goes into effect. This stay instantly halts most collection activities against the debtor, including creditor phone calls, collection letters, wage garnishments, lawsuits, and foreclosures. The automatic stay prevents creditors from taking further action to collect debts while the bankruptcy case proceeds.

Within approximately 20 to 50 days after the petition is filed, debtors must attend a “meeting of creditors,” also known as the 341 meeting. This meeting is typically held outside of a courtroom, presided over by a bankruptcy trustee. The debtor must appear, present identification, and answer questions under oath regarding their financial affairs and filed documents. While creditors are notified and can attend, they often do not appear.

Following the 341 meeting, the bankruptcy process diverges based on the chosen chapter. In a Chapter 7 case, if there are no significant issues, the court typically issues a discharge order approximately 60 to 90 days after the 341 meeting. This order legally releases the debtor from personal liability for most dischargeable debts, including credit card balances. For Chapter 13 cases, the debtor’s proposed repayment plan must be confirmed by the court after the 341 meeting, and payments to the trustee begin.

In a Chapter 13 case, the discharge occurs only after the debtor successfully completes all payments under the confirmed repayment plan, which typically lasts three to five years. Once all plan payments are made, the court issues a discharge order for any remaining eligible debts. Throughout both Chapter 7 and Chapter 13 processes, debtors must continue to cooperate with the trustee and fulfill any additional requirements.

Immediate Impact on Credit Card Accounts

When a bankruptcy petition is filed, an immediate change occurs regarding an individual’s credit card accounts. This is driven by the automatic stay, which takes effect upon filing. Credit card companies are promptly notified of the bankruptcy filing. Upon receiving this notice, they are legally prohibited from engaging in further collection activities, including phone calls, sending bills, or initiating lawsuits.

Credit card accounts are almost universally closed by issuing companies once they become aware of the bankruptcy filing. This closure occurs regardless of whether the account carries a balance, as bankruptcy filings are public records. Most credit card agreements include clauses permitting the issuer to cancel the card upon notice of bankruptcy.

Upon successful completion of the bankruptcy process, the balances on included credit card accounts are legally addressed. In a Chapter 7 bankruptcy, eligible credit card debts are typically discharged, meaning the debtor is no longer legally obligated to repay them.

For Chapter 13 bankruptcy, credit card debts are restructured within a court-approved repayment plan. Upon successful completion of all payments under this plan, any remaining eligible credit card balances are discharged. Certain exceptions exist for discharge, such as debts incurred through fraudulent activity or large luxury purchases made shortly before filing. These may be challenged by creditors and potentially excluded from discharge.