What Happens When You File Bankruptcy for Credit Card Debt?

Navigating overwhelming credit card debt often leads individuals to explore bankruptcy. This article clarifies what occurs when an individual pursues bankruptcy to resolve burdensome credit card obligations, detailing the process from initial consideration to resolution.

Understanding Bankruptcy Options for Credit Card Debt

Individuals facing significant credit card debt typically consider two primary forms of personal bankruptcy: Chapter 7 and Chapter 13. Each chapter has distinct eligibility requirements. The choice between these options depends heavily on a debtor’s income, assets, and ability to repay a portion of their debts.

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, aims to provide a quick financial fresh start by discharging most unsecured debts. To qualify for Chapter 7, debtors must pass a “means test,” which assesses whether their income is below the median income for a household of their size in their state. If income exceeds the median, a more complex calculation determines if there is sufficient disposable income to repay unsecured creditors.

Chapter 7 treats credit card debt as unsecured debt, meaning it is not tied to any collateral. In most Chapter 7 cases, credit card debts are discharged. Debts incurred through fraud may be exempt from discharge. The process involves a court-appointed trustee who may sell non-exempt assets to pay creditors, though many Chapter 7 cases are “no-asset” cases where no property is liquidated.

Chapter 13 bankruptcy, known as reorganization bankruptcy, allows individuals with a regular income to develop a plan to repay all or a portion of their debts over time. This option is suitable for debtors who have valuable assets, such as a home, that they wish to retain. Unlike Chapter 7, Chapter 13 does not have a strict income cap, but it requires debtors to demonstrate sufficient disposable income to fund a repayment plan.

Chapter 13 also has specific debt limits; as of April 1, 2025, unsecured debts cannot exceed $526,700 and secured debts cannot exceed $1,580,125. Credit card debt is incorporated into this court-approved repayment plan, which lasts three to five years. Payments are made to a Chapter 13 trustee, who then distributes funds to creditors. At the successful completion of the plan, any remaining balance on eligible credit card debt and other unsecured obligations is discharged.

The Bankruptcy Filing and Progression

The bankruptcy process involves a series of structured steps, beginning before the official filing and continuing through to the resolution of the case. These stages ensure compliance with federal law and provide a framework for addressing a debtor’s financial situation.

All individual bankruptcy filers must complete a pre-bankruptcy credit counseling course. This counseling must be obtained from an agency approved by the U.S. Trustee Program within 180 days before filing the bankruptcy petition. The purpose of this session is to assess the debtor’s financial situation and explore potential alternatives to bankruptcy, though participation does not obligate the debtor to accept any proposed solutions.

Once credit counseling is complete, the debtor, often with legal assistance, prepares and submits the bankruptcy petition along with detailed schedules. These comprehensive documents disclose all assets, liabilities, income, and expenses, providing a complete financial picture to the court. The petition initiates the legal process, and the debtor pays the required filing fees, which are $338 for Chapter 7 and $313 for Chapter 13, though waivers or installment plans may be available for eligible individuals.

Immediately upon filing the bankruptcy petition, an “automatic stay” goes into effect. This legal injunction prevents most creditors, including credit card companies, from taking collection actions against the debtor or their property. This protection halts activities such as collection calls, lawsuits, wage garnishments, and repossessions, providing the debtor with relief. The automatic stay remains in effect throughout the bankruptcy case, unless a creditor successfully petitions the court to lift it.

Within 20 to 50 days after the petition is filed, the debtor must attend a “Meeting of Creditors,” also known as the 341 meeting. This meeting is conducted by a court-appointed bankruptcy trustee. The trustee’s role is to verify the debtor’s identity and review the accuracy and completeness of the bankruptcy paperwork, asking questions under oath about the debtor’s financial affairs. Creditors are permitted to attend and ask questions, but they rarely do, as the trustee generally represents the interests of unsecured creditors.

Following the 341 meeting, debtors are required to complete a second mandatory course, a pre-discharge debtor education course, before their debts can be discharged. This course focuses on financial management and is designed to help debtors avoid future financial difficulties. Like the pre-filing counseling, this course must be taken from an approved provider. Failure to complete this course can result in the case being closed without a discharge.

The final step in the process varies by chapter. In a Chapter 7 case, within 60 to 90 days after the 341 meeting, the court issues a discharge order. For Chapter 13 cases, after the 341 meeting, the court holds a confirmation hearing to approve the proposed repayment plan. Once confirmed, the debtor makes payments according to the plan for three to five years, and a discharge is granted upon successful completion of all payments.

Resolution of Credit Card Debt and Other Unsecured Liabilities

The conclusion of a bankruptcy case brings specific outcomes for credit card debt and other unsecured liabilities, varying based on the type of bankruptcy filed. The legal effect of the discharge order is central to understanding how these debts are resolved, providing debtors with a defined end to their obligations.

In a Chapter 7 bankruptcy, credit card debt is discharged. The discharge order, issued by the court, serves as a permanent injunction prohibiting creditors from attempting to collect the discharged debt. This legal effect applies specifically to debts incurred before the bankruptcy filing date. Credit card accounts associated with discharged debt are closed, and creditors are barred from engaging in any collection activities, including phone calls or sending statements.

Credit card debt is classified as an unsecured, non-priority debt, meaning it ranks lower in the hierarchy of payments if any assets are liquidated in a Chapter 7 case. In most Chapter 7 filings, known as “no-asset” cases, there are no non-exempt assets available to sell, so unsecured creditors, including credit card companies, receive no payment. Even if assets are liquidated, credit card companies are among the last to receive distributions.

For Chapter 13 bankruptcy, credit card debt is incorporated into the court-approved repayment plan. The plan outlines how much of the credit card debt, if any, will be repaid over the three-to-five-year period. The amount paid depends on the debtor’s disposable income and the value of their non-exempt assets. It is common for unsecured creditors, such as credit card companies, to receive only a partial payment, or even no payment, through the Chapter 13 plan.

Upon successful completion of all payments under the Chapter 13 plan, any remaining balance on credit card debt and other eligible unsecured liabilities is discharged. This final discharge provides the same legal protection as a Chapter 7 discharge, preventing creditors from future collection efforts. This allows debtors to complete their repayment obligations and emerge from bankruptcy with a fresh financial start.

Beyond credit card debt, other common unsecured liabilities like medical bills and personal loans are treated similarly within both Chapter 7 and Chapter 13 bankruptcy frameworks. In Chapter 7, these debts are discharged alongside credit card debt. In Chapter 13, they are included in the repayment plan, and any remaining balances are discharged upon completion. The filing of bankruptcy immediately stops collection calls and other harassment from all included creditors, providing immediate relief from financial pressures.