What Happens to Credit Cards in Chapter 13?

Chapter 13 bankruptcy offers individuals a structured path to address financial challenges under court oversight. This process enables those with a consistent income to establish a repayment plan for all or a portion of their outstanding debts. The plan typically spans a period of three to five years, providing a systematic approach to financial reorganization. It functions as a supervised framework designed to help debtors regain stability.

Immediate Impact on Credit Card Accounts

Upon filing a Chapter 13 bankruptcy petition, an “automatic stay” goes into effect (11 U.S.C. § 362). This stay immediately halts most collection efforts by creditors, including credit card companies. Creditors are prohibited from activities such as collection calls, demand letters, lawsuits, or wage garnishments. The automatic stay provides immediate relief from aggressive collection tactics.

Credit card accounts are almost universally affected, with creditors typically freezing or closing them shortly after receiving notice of the bankruptcy filing. This action occurs because credit card companies are alerted to the bankruptcy through public records and must comply with the automatic stay. Consequently, the ability to use existing credit cards ceases entirely once the petition is filed.

For joint credit card accounts, or those where the debtor is an authorized user, the situation can be more intricate. While the debtor’s liability and ability to use the card are suspended, a co-signer or primary cardholder on a joint account may still remain liable for the debt, unless the court authorizes otherwise. Authorized user status is generally removed.

Credit Card Debt Treatment in Chapter 13

Within Chapter 13 bankruptcy, credit card debt is typically classified as unsecured, non-priority debt. This places it lower in the repayment hierarchy compared to secured debts like mortgages or car loans, or priority unsecured debts such as certain taxes or child support. The treatment of credit card debt depends on the debtor’s income, necessary expenses, and non-exempt assets.

Unsecured creditors, including credit card companies, may receive a percentage of what they are owed, ranging from zero to one hundred percent. The specific amount is determined by the debtor’s disposable income, which is the amount remaining after essential living expenses and payments to secured and priority creditors. All disposable income must be committed to the repayment plan.

The Chapter 13 plan proposes how payments will be distributed to these creditors over the three to five-year period. Once the debtor successfully completes all payments under the confirmed plan, any remaining balance on the credit card debt is legally discharged. This means the debtor is no longer legally obligated to repay that specific debt.

While most credit card debt is unsecured, a small number of credit cards are secured, meaning they are tied to an asset like a savings account. Such secured credit cards would be treated differently in Chapter 13. The vast majority of credit cards used by consumers are unsecured and fall under the standard treatment for non-priority debt.

Credit Card Use During and Post-Chapter 13

During an active Chapter 13 repayment plan, obtaining new credit, including new credit cards, is generally restricted. Debtors typically require court approval to incur significant new debt, as specified under bankruptcy guidelines. This approval is usually granted only for emergencies or essential needs, such as a necessary vehicle or medical expenses, to ensure the debtor can maintain their repayment plan.

Following the successful completion and discharge of a Chapter 13 bankruptcy, the filing remains on credit reports for a period of seven years from the date of filing. This reporting by credit bureaus reflects the bankruptcy status, which can affect credit scores.

Despite the bankruptcy appearing on the credit report, individuals can obtain new credit cards after their Chapter 13 discharge. While initial terms, such as interest rates and credit limits, might be less favorable due to the recent bankruptcy, credit can become more accessible over time. The discharged credit card accounts will be reported on credit reports as “discharged in bankruptcy” or similar notations.