Does Filing for Bankruptcy Eliminate Credit Card Debt?

Filing for bankruptcy can provide financial relief for individuals burdened by overwhelming debt, including credit card obligations. Credit card debt is a common form of unsecured debt, meaning it is not backed by collateral. This article provides an overview of how bankruptcy addresses these debts.

The Concept of Debt Discharge in Bankruptcy

Debt discharge in bankruptcy signifies a court order that releases a debtor from personal liability for specific debts. This means the debtor is no longer legally required to repay it. Creditors are then legally prohibited from attempting to collect the discharged debt through lawsuits, phone calls, or letters.

Discharge provides individuals with a “fresh start” by eliminating their obligation to pay certain debts. While discharge removes personal liability, it generally does not eliminate an underlying lien if the debt was secured by property, though credit card debt is typically unsecured. The timing of a discharge varies depending on the type of bankruptcy filed, with Chapter 7 cases often seeing discharge within a few months, and Chapter 13 cases granting it after the successful completion of a repayment plan.

Bankruptcy Chapters and Credit Card Debt

Bankruptcy law provides different chapters for individuals seeking debt relief, with Chapter 7 and Chapter 13 being the most common for consumers. Both chapters offer mechanisms for addressing and often discharging credit card debt, which is typically considered unsecured. The choice between chapters depends on a debtor’s income, assets, and financial situation.

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, is for debtors with limited income and assets. Most unsecured debts, including credit card balances, are typically discharged within four to six months after the petition is filed. To qualify for Chapter 7, debtors must generally pass a “means test,” which assesses whether their income is below the median for their state or if they have sufficient disposable income to repay debts. If a debtor’s income is too high, they may need to consider Chapter 13.

Chapter 13 bankruptcy, known as reorganization bankruptcy, is for debtors with a regular income who can repay some or all of their debts through a court-approved repayment plan. This plan typically spans three to five years. Under a Chapter 13 plan, unsecured debts are often paid only a fraction of what is owed, or sometimes nothing, depending on the debtor’s disposable income and non-exempt assets. Upon successful completion of all payments, any remaining credit card debt included in the plan is discharged.

The distinction in how credit card debt is handled lies in the timeline and repayment structure. Chapter 7 offers a quick discharge without a repayment plan, while Chapter 13 involves a multi-year repayment commitment before discharge. In either chapter, filing a bankruptcy petition triggers an “automatic stay,” which immediately halts most collection efforts by creditors, including those for credit card debts. This temporary injunction provides debtors with immediate protection from collection calls, lawsuits, and wage garnishments.

Credit Card Debts Not Subject to Discharge

While bankruptcy can eliminate most credit card debt, certain circumstances may render obligations non-dischargeable. These exceptions are in place to prevent abuse of the bankruptcy system. A debt incurred through fraud, for example, may not be discharged. This includes situations where a debtor made false statements to obtain credit or incurred charges with no intention of repayment.

Specific presumptions of fraud exist for certain credit card transactions made shortly before filing for bankruptcy. Cash advances totaling over $1,000 taken within 70 days before filing, or purchases of luxury goods or services exceeding $725 from a single creditor within 90 days before filing, may be presumed non-dischargeable. Creditors who believe a debt was incurred fraudulently can file an “adversary proceeding” with the bankruptcy court to object to its discharge. If the court finds evidence of fraud, these specific debts may remain enforceable.

Credit card debt tied to court-ordered fines, penalties, or restitution may also be non-dischargeable, as outlined in 11 U.S.C. 523. Similarly, in rare cases where a credit card was used to pay a non-dischargeable tax debt, that specific portion might remain. Debtors must accurately list all their debts in the bankruptcy petition and schedules. Debts not properly listed may not be discharged, as creditors must receive notice to participate in the bankruptcy process, as per 11 U.S.C. 521 and Federal Rule of Bankruptcy Procedure 1007. Lastly, if a debtor voluntarily enters into a reaffirmation agreement for a credit card debt, agreeing to remain personally liable, that specific debt will not be discharged. Reaffirmation agreements are uncommon for credit card debts, but they legally bind the debtor to repay the debt despite the bankruptcy.

After Credit Card Debt Discharge

Following the discharge of credit card debt in bankruptcy, the discharge acts as a permanent court order, known as a discharge injunction. This injunction, specified under 11 U.S.C. 524, legally bars creditors from attempting to collect the discharged debt. Any attempt by a creditor to collect a discharged debt after the injunction is in place can lead to legal penalties for the creditor.

Credit card accounts associated with discharged debt will be closed by the issuers. The bankruptcy filing and subsequent discharge will be reported on the debtor’s credit report, typically showing a zero balance and a notation that the debt was “discharged in bankruptcy.”

While most credit card debt is unsecured, if a secured credit card was involved (where collateral like a savings account secures the debt), the collateral might still be at risk if the debtor did not reaffirm the debt or make alternative payment arrangements. For unsecured credit card debts, the discharge provides complete relief from personal liability.