Can You Just File Bankruptcy on Credit Cards?

Facing overwhelming debt often leads individuals to explore bankruptcy. This legal process helps people address financial difficulties and achieve a fresh start. Many consider bankruptcy for significant credit card balances. However, bankruptcy involves a comprehensive review of all debts, not just credit cards, and handles different debt types according to specific legal frameworks.

How Credit Card Debt is Treated in Bankruptcy

Credit card debt is unsecured debt, meaning it is not backed by collateral like a house or car. This distinction is important in bankruptcy because unsecured creditors have no claim to specific property if payments stop. In both Chapter 7 and Chapter 13 consumer bankruptcies, unsecured debts are generally treated favorably for the debtor.

Chapter 7 bankruptcy, or liquidation bankruptcy, allows for the quick discharge of most unsecured debts, including credit card balances. A court-appointed trustee may sell non-exempt assets to repay creditors, though many Chapter 7 cases involve no asset sales. The discharge legally eliminates the debtor’s responsibility to pay these debts, prohibiting creditors from collection.

Chapter 13 bankruptcy, or reorganization bankruptcy, involves a court-approved repayment plan lasting three to five years. Debtors make regular payments to a trustee, who distributes funds to creditors. Credit card debt, as unsecured debt, often has low priority in these plans, meaning only a portion may be repaid. Once the plan is completed, any remaining balance on these unsecured debts is discharged.

Bankruptcy is not a universal solution for all financial obligations. Certain debts are non-dischargeable, meaning they cannot be eliminated. These include domestic support obligations like child support and alimony. Recent taxes are also not dischargeable.

Most student loans are non-dischargeable unless the debtor can demonstrate “undue hardship,” a difficult standard to meet. Debts incurred through fraud or misrepresentation, fines and penalties owed to government entities, and debts for willful and malicious injury to another person or property are also non-dischargeable. While credit card debt can often be addressed, other significant financial responsibilities will persist after filing.

Understanding Eligibility and the Filing Process

Before filing for bankruptcy, individuals must meet eligibility requirements and gather financial documentation. For Chapter 7, eligibility is determined by the “Means Test,” which evaluates if a debtor’s income is low enough to qualify. This test compares the debtor’s average monthly income over the past six months to the state’s median income for a similar household size. If income exceeds the median, the test analyzes disposable income after allowed expenses to determine repayment ability.

A mandatory pre-filing credit counseling course is a requirement for all individual bankruptcy filers. This course, completed within 180 days before filing, helps individuals explore alternatives to bankruptcy and understand its implications. The certificate of completion from an approved agency must be filed with the bankruptcy petition.

Preparing for bankruptcy involves compiling financial records for the petition and schedules. Required documents include pay stubs for the last six months, tax returns for the past two to four years, and bank statements for three to six months. Also required are statements for all debts, property deeds, vehicle titles, and retirement account statements. The court and trustee use these documents to verify the debtor’s financial situation and ensure accurate reporting.

After preparation, the filing process begins by submitting the bankruptcy petition and supporting documents to the court. Upon filing, an “automatic stay” takes effect. This legal injunction temporarily halts most collection actions by creditors, including calls, lawsuits, foreclosures, and wage garnishments. The automatic stay provides relief, allowing the debtor to proceed without immediate creditor pressure.

A mandatory “Meeting of Creditors,” also known as a 341 meeting, is scheduled after the petition is filed. During this meeting, the debtor meets with the bankruptcy trustee and answers questions under oath about their financial affairs, property, debts, income, and expenses. Creditors are notified and may attend, though they rarely appear. This meeting is not a court hearing, and a judge is not present.

Following the 341 meeting, debtors must complete a post-filing financial management course, also known as debtor education. This course focuses on personal financial management skills, such as budgeting and responsible credit use. The certificate of completion must be filed with the court for the debtor to receive a discharge. The final stage is the discharge, which legally eliminates eligible debts, typically occurring after the meeting of creditors in Chapter 7 cases.

Financial Implications After Discharge

Upon discharge of eligible debts, the debtor is legally relieved of the obligation to pay them, and creditors are prohibited from collection. Credit card companies cannot demand payment for discharged balances. The bankruptcy filing and discharge will appear on the individual’s credit report.

A Chapter 7 bankruptcy remains on a credit report for up to 10 years from the filing date, while a Chapter 13 bankruptcy stays for up to seven years. This notation serves as a public record of the bankruptcy. An individual’s credit score will likely decrease significantly immediately following the bankruptcy filing.

While the initial impact on credit scores is substantial, the negative effect lessens over time, even while the bankruptcy remains on the credit report. Obtaining new credit, such as loans or credit cards, is more challenging immediately after a discharge. Lenders may view individuals with a recent bankruptcy as higher risk. However, access to credit becomes more feasible over time, often with higher interest rates or through secured credit options.

Reaffirmation agreements are a consideration, primarily for secured debts like car loans or mortgages, where a debtor agrees to continue making payments on an otherwise dischargeable debt. This is done to retain the collateral property. For credit card debt, reaffirmation is rare as there is no collateral, and the goal is to discharge these unsecured obligations.