It is not hard to believe that credit card debt is the most common type of debt that Americans face today. Credit cards have been a standard in our society for decades and if used correctly they can be truly helpful; but sometimes, despite the best of intentions, credit cards may lead to a slippery slope of overwhelming debt. For that reason credit cards are one of the main reasons individuals in American choose to go bankrupt, even though there is not technically a type of bankruptcy called a “credit card bankruptcy.” The staggering interest rates, minimum payments, and high credit lines are, in some cases, a recipe for financial disaster. Declaring bankruptcy can typically eliminate unsecured debt like credit cards in slightly different ways depending on whether a chapter 7 vs. chapter 13 is filed.
Chapter 7 bankruptcy is commonly used to wipe away unsecured debt. Credit card debt is classified as unsecured because ultimately there is no collateral against the items purchased on the credit card. In other words, the credit card debt is not tied to a single item like a vehicle or a home, but to the various purchases made with the credit card. When an individual files Chapter 7 bankruptcy they will list all of their creditors on the bankruptcy paperwork, or petition, in order for the creditors to be notified of their decision. Then, if the bankruptcy court decides to approve the Chapter 7 bankruptcy, a discharge notice will be sent to those same creditors stating that the debt has been eliminated by the debtor filing bankruptcy. Because bankruptcy is governed by federal law, the discharge is not something that credit card companies can just ignore.
Chapter 13 bankruptcy takes care of credit card debt in a different way, but achieves the same overall goal: finding financial freedom through becoming debt free. Chapter 13 bankruptcy utilizes a repayment plan where qualified debtors are allowed to pay back a portion of their overall unsecured debt over the course of 3-5 years. The payment plan is based on the debtor’s income, total debt, and other variables depending on their specific situation. Bankruptcy lawyers work closely with both the debtor and the Chapter 13 bankruptcy trustee to find a monthly payment amount that will work for everyone involved. By the end of the 3-5 year Chapter
13 payment plan the debtor will typically be debt free and caught up on all secured monthly payments like vehicles and home.
Since the bankruptcy laws were revamped in 2005 there is no such thing as only filing on 1 or 2 credit cards. In most cases any debt listed on the debtor’s credit report is listed on the bankruptcy paperwork to be potentially eliminated. Credit card debt can go from manageable to overwhelming in a matter of days, so taking control of the situation quickly is crucial. Filing bankruptcy isn’t the answer for everyone, but if you are facing an amount of credit card debt that you cannot see yourself coming out of in the next few years then looking into bankruptcy may be something to look into.