Credit Card Debt in Chapter 7 Bankruptcy

By Cara O'Neill, Attorney
All or most of your credit card debt will likely be discharged in Chapter 7 bankruptcy unless property secures your account, or you've engaged in fraudulent activity.

Credit cards are a staple in today’s consumer-driven society and are used in predictable ways. When times are good, you rack up points for vacations and other luxury items and pay the balance regularly. But when the lean times come—such as after a job loss—it's common to pull out the card for the copay at the doctor’s office, or to fix squeaking brakes. When things don’t start looking up, however, you might not be able to meet the hefty monthly payments. That’s when Chapter 7 bankruptcy offers a simple solution. If you qualify, it quickly wipes out your burdensome credit card debt and gives you the breathing room you need to get back on your feet. But before you sign up, you should be wary of a few pitfalls.

You Can Wipe Out (Discharge) Unsecured Credit Accounts

Here’s the good news. The balance on the majority of the cards in your wallet will get wiped out in Chapter 7 bankruptcy. That's because most of your accounts are likely “unsecured,” meaning that if you don’t pay your monthly payment as agreed, the creditor cannot take back the school supplies you bought in August to satisfy your obligation. When you signed the credit contract, you entered into a “promise to pay” agreement wherein you did just that: You promised to pay back the amount you charged on the card, plus interest, but nothing more. Specifically, you didn’t pledge property (such as your car) that the creditor could take if you failed to make your monthly payment.

The creditor’s only recourse is to file a lawsuit against you and obtain a money judgment. Once the court’s ruling is in hand, the credit card company can reclaim what you owe by using collection procedures. For instance, the creditor can force your employer to deduct money from your paycheck (garnishment), or instruct the bank to withdraw money from your account (levy).

If you get served with a lawsuit and you haven’t already spoken to a bankruptcy attorney, it would be a good time to do so. You have limited time to respond to the complaint (usually 30 days or less). The attorney will review the court papers and help determine whether you should file for Chapter 7 bankruptcy before the court enters a judgment. Here’s one reason you’d want to file soon: If the complaint alleges that you committed fraud (perhaps by claiming that you stole your elderly father’s identity), and the judgment comes before filing for bankruptcy, in most cases, you won’t be able to discharge the debt. If your bankruptcy filing occurs before the court enters the judgment against you, you’ll stand a better chance of wiping out your credit card balance.

When you complete your bankruptcy forms, you’ll list your unsecured charge accounts on Schedule E/F: Creditors Who Have Unsecured Claims. After filing for Chapter 7 bankruptcy, if all goes as planned, the court will discharge your unsecured credit card balances about 60 days after your “341 meeting of creditors,” which is the one court appearance you must attend. (You can find fillable, downloadable bankruptcy forms on the U.S. Court’s website.)

Secured Credit Card Balances Don’t Go Away

Some credit accounts—such as furniture, jewelry, and appliance store accounts—are secured rather than unsecured. When you signed these contracts, you likely entered into a “purchase money security agreement” with the store—probably without even realizing it—and agreed that if you failed to pay your obligation, the product you bought would guarantee payment. Yes, you read that right. If you don’t pay your bill, the store can pick up your television, bed, refrigerator—even the ring on your fiance’s finger. To find out if a particular charge account is secured, you’ll want to review the contract or the back of your receipt.

When you complete your bankruptcy forms, you’ll report your secured accounts on Schedule D: Creditors Who Hold Claims Secured By Property. You’ll have the option to either return the property to the store and wipe out the balance or keep the property and continue to pay on it. You’ll explain your choice on the Statement of Intention for Individuals Filing Under Chapter 7 form.

A “Charge-Off” Doesn’t Mean Your Debt Is Gone

A “charge-off” happens when a creditor sells your debt to a collection agency and writes the debt off its books, listing the account as “charged off.” Consumers often think that when a credit report lists an account as a “charge-off,” they are no longer responsible for the debt. It isn’t true—debts are charged off for the benefit of the creditor’s account books, not to give the consumer a break. Simply put, stripping bad debt off the books is a financial practice that allows the company to appear healthier to its stockholders because it removes the debt from the “minus” column. Selling consumer debt is often a cozy affair; the first debt collector that buys your account could well be a subsidiary of the original credit card company. But regardless of who buys your debt, the debt doesn't go away. Instead, your payment responsibility only changes from your credit card company to your obligation’s new owner.

Problems That Might Land You in Court

Although an unsecured credit card balance is often the easiest type of debt to get rid of, things can still go wrong. A creditor can oppose the discharge of a debt by filing a lawsuit called an “adversary proceeding” in the bankruptcy court. Here are a few points you’ll want to be aware of:

  • Although you can use your credit card for necessary purchases, such as food, modest clothing, and utilities, luxury purchases made within 90 days of filing for bankruptcy are presumed fraudulent.
  • Your creditor might allege that you committed fraud if you were untruthful on your credit card application.
  • You might run into a problem if you transfer the balances of nondischargeable debt, such as student loans or income taxes, onto your credit card.
  • If you have a gambling problem, and you took out cash advances on your credit card, your state might have a law that prevents you from discharging the advances.
  • If you’re currently being sued in state court, filing for bankruptcy might stop the litigation. If you’re well into the proceedings, the bankruptcy court could allow the state case to continue to judgment; or, you might find yourself litigating the same issues in the bankruptcy court.

It's important to understand that this is far from a full list. If you’re not sure if you’ve run afoul of one of these issues, or suspect you might have others, it’s a good idea to consult with a knowledgeable attorney in your local area.

Questions for Your Attorney

  • My credit card company charged off my account three years ago and hasn’t tried to collect yet, do I need to worry?
  • What will happen if I keep the property that secures my credit card debt, but I don’t pay off the balance?
  • How long is a judgment for credit card debt good in my state?
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