Can Filing for Bankruptcy Clear Credit Card Debt?
By FindLaw Staff | Legally reviewed by Bridget Molitor, J.D. | Last reviewed February 21, 2021
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Yes, declaring certain forms of bankruptcy can clear most of your credit card debt. It can also help you form a repayment plan and stop a credit card company from harassing you.
You can file a Chapter 7 bankruptcy to clear credit card debt. It is the Bankruptcy Code chapter that works on almost all of a consumer's unsecured debt. This type of bankruptcy will not remove your taxes or student loans, but it can help give you a fresh start from credit card payments. It also protects your property from creditors trying to seize your assets to pay back this type of debt.
Bankruptcy filers should also keep in mind that the bankruptcy discharge can take four to six months after filing the bankruptcy petition.
Chapter 7 for Credit Card Debt: How It Works
While still in debt, credit card issuers may:
- Raise your interest rates
- Charges late fees
- Charge over-balance fees
- Give your account to a debt collection agency
- Deny new credit card applications
- File a debt collection lawsuit to try to claim repossessions
Collection agencies can call you at home or work and demand payment of your total debt. This harassment is legal (with certain exceptions) unless you file a Chapter 7 or use another method to stop creditor harassment.
Speak to a bankruptcy attorney to decide if Chapter 7 bankruptcy is right for your financial situation. Once you file for bankruptcy, you will get an "automatic stay" that:
- Stops creditors from calling
- Erases unsecured credit card debt
- Stops wage garnishment for debts
- Appears on your credit history and lowers your credit score
Can I File for Chapter 7?
Anyone can file a Chapter 7 bankruptcy case in bankruptcy court, but you may not always be successful. In some cases, you could even be denied later on for not following the bankruptcy filing terms or debt management plan.
Your average income for the year must typically be below the median income for your state to qualify for Chapter 7 bankruptcy. This is called the "Means Test."
Do I Pass the Chapter 7 Means Test?
You can find your state's median income for singles or families from the U.S. Trustee Program. For example, in Oregon, a single earner must make less than $56,957 to file for Chapter 7 bankruptcy.
However, you can also subtract certain expenses from your monthly income. If you do not qualify based on your income, you may still be eligible based on your expenses and leftover disposable income.
Getting Rid of Credit Card Debt in Chapter 13 Bankruptcy
If you make more money than the median income, you should speak to a bankruptcy attorney to review your options.
You can file for Chapter 13, which creates a repayment plan and gives you more time to pay off your debts without creditors harassing you.
The plan could give you 36-60 months to pay off the debt. In most cases, you will need to pay off a fraction of credit card debt, and the rest can be discharged.
Reasons Debt Discharge Is Denied
You can face a lawsuit within the bankruptcy case, called an "adversary proceeding." This is when a creditor says some of your debts should not be dismissed. This can happen for many reasons, but two common reasons for adversary proceedings include when a debtor has purchased luxury goods or you have used your credit card for expenses that cannot be dismissed through bankruptcy.
Luxury Goods Objection
One of the most common instances of the creditor's objecting to debt dismissal is if you bought "luxury goods" or luxury services within 90 days of filing for Chapter 7. The cost limit for these items and services is $675 within 90 days.
Be careful: the courts can decide that luxury means anything not completely necessary to survive day-to-day or for your children. The line can be very tricky — buying your child a reasonable bike can be very different than purchasing an at-home luxury exercise bike for yourself.
Paying Non-Dischargeable Debts Objection
A creditor may also object to your Chapter 7 debt dismissal if you used your credit card on items not traditionally dismissed in bankruptcy. This list includes:
- Alimony (spousal support)
- Child support
- Taxes or back taxes
- Student loans
Credit Card Companies Can Sue You Before a Chapter 7 Filing
Credit card companies have the option to bring a debt collection lawsuit against you. This allows them to ask a judge to issue a personal judgment against you, making you personally responsible for your credit card debt.
If the judge agrees, a lien may be placed on your property and your debt will no longer be "unsecured." Your personal property can legally be used for repayment. In some cases, your real estate, car, or income can be taken to repay your debts.
If paying an attorney (and often the attorney's fees of the creditor) is not affordable, your best option may be to file for bankruptcy to stop the lawsuit before the judgment. After the judgment, filing for bankruptcy won't automatically remove a lien against you, but you can file a motion to avoid the lien.
At What Point Should You Call a Bankruptcy Attorney?
If you suspect you cannot repay your credit card debt, or if creditors are harassing you, you should talk to a bankruptcy attorney to better understand your options.
The case will involve paperwork, court dates, bankruptcy classes, filing fees, and many confusing laws along the way. If you can afford a bankruptcy attorney, they can be instrumental in the overall process.
Most offer a free consultation on your situation, and you can often hire an attorney to help you through the process for less than $2,000.
When you are already facing debt, that number can seem unachievable. A bankruptcy attorney can make sure you choose the best options for you, stop creditor harassment, and get you on the right track to debt relief. Overall, these steps can save you money in the long run.