Discharging Credit Card Debt in Bankruptcy

When a person defaults on credit card bills, companies may attempt to collect their money through debt collection lawsuits and eventually, personal judgments. It is relatively easy for a credit card company to prove that a person owes them money, as the company only needs to prove that a debtor signed a credit card agreement with them and did not pay the charges incurred. With that personal judgment in hand, a credit card company may take actions to collect on that judgment by garnishing an individual’s wages, attaching bank accounts, taking possession of personal property, or even filing liens on real estate. 

To avoid credit card companies from filing debt collection lawsuits and obtaining personal judgments, individuals with unmanageable amounts of credit card debt should consider filing for either Chapter 7 or Chapter 13 Bankruptcy.

By filing for Chapter 7 Bankruptcy Protection, a debtor can discharge almost all of its credit card debt because credit card debt is generally unsecured debt, meaning that the debt is not collateralized by a property interest. Once someone files for Chapter 7 Bankruptcy there is a Bankruptcy Trustee appointed to start managing the Bankruptcy proceedings and will determine if the debtor is, in fact, eligible for Chapter 7 Bankruptcy. 

A debtor whose average income falls below the state median income will pass the Chapter 7 Means Test and will be eligible for debt discharge under Chapter 7. If a debtor’s average income does not fall below the state median income, then they may be eligible for Chapter 7 relief if their “disposable income” is very low or nonexistent. Disposable income is calculated by taking a debtor’s allowable expenses and subtracting them from that debtor’s monthly income.

There are a few cases when a Chapter 7 Bankruptcy may not discharge credit card debt. First, if a debtor has incurred a large amount of credit card debt in purchasing luxury goods or services adding up to more than $675 on or within 90 days before a Bankruptcy Petition has been filed, those amounts of credit card debt may be deemed nondischargeable in bankruptcy. Second, credit card debt may not be discharged if the debtor used those credit cards to pay for other non-dischargeable debts, like domestic support obligations, student loans, or tax penalties.

 

If a person is not eligible for bankruptcy relief under Chapter 7, they may, however, be eligible for relief under Chapter 13. Unlike Chapter 7, where the debtor is discharged from almost all of his debts, Chapter 13 Bankruptcy provides for a repayment plan of up to 3 to 5 years. Once a debtor completes the court-approved payment plan, then the rest of the outstanding credit card is discharged. Those individuals who choose to file Chapter 13 Bankruptcies are allowed to keep most of their assets and must be disciplined to make regular monthly payments according to the court-approved payment plan.

If you would like more details, please do not hesitate to call our office. Our office has been successful in helping consumers with collection problems for over 28 years. If you have a debt or tax problem please contact Frank Portera at (847) 705-7555 or fportera@lavellelaw.com and find out how we can help you. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.