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Is credit card debt discharged in bankruptcy?

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Q:

Is credit card debt discharged in bankruptcy?

A:

Credit card debt is unsecured debt, which means that there is no property or collateral attached to the debt that can be repossessed or sold to repay the debt obligation. Whether the credit card debt will be discharged in bankruptcy, however, will depend on whether a debtor chooses to file Chapter 7 or Chapter 13 bankruptcy; whether a debtor’s bankruptcy estate has enough money to repay the balance of the debt, and whether the unsecured debt is considered dischargeable under bankruptcy law.

Dischargeable unsecured debt, such as credit card debt, remaining after the completion of the Chapter 7 or Chapter 13 bankruptcy, is generally discharged. Exceptions exist, however, if the bankruptcy court determines that the debtor has committed fraud.

Fraud and Credit Card Debts

Credit card debt obtained through fraud or false misrepresentation may be challenged by creditors. Creditors must file a complaint with the court within 60 days from the first meeting of the creditors. If the creditor fails to file the complaint within the specified deadline, however, even fraudulent charges can be discharged. If the complaint is filed, the court will schedule a hearing to make a determination about the debt’s dischargeability.

So what is considered a fraudulent credit card charge? Fraud for credit card charges fall into two categories: luxury goods purchases and cash advances. Fraudulent luxury goods purchases include using a single credit card to purchase more than $650 worth of luxury goods or services within 90 days of filing for bankruptcy. Cash advance fraudulent charges include obtaining more than $925 within 70 days of filing bankruptcy.

If the creditor files a complaint for either of these two fraudulent actions, it will be up to the debtor to prove that they had every intention to repay the debt when they made the charges.

Considerations Before Filing Bankruptcy

Most credit card debts can be discharged by filing Chapter 7 bankruptcy, especially if the debtor has limited assets in their bankruptcy estate to liquidate. Filing Chapter 13 may also allow some credit card debts to be discharged, although a percentage of the debt is generally included in the bankruptcy debt repayment plan.

High credit card debt, however, is not always a good reason to file bankruptcy. Filing bankruptcy is a very serious decision that should not be made without careful consideration. Factors that should be considered include:

  • Costs to file bankruptcy

Filing bankruptcy can be expensive. Chapter 7 bankruptcy filers will pay $335 in filing and administrative fees. Chapter 9 filers will pay $ 1,717.00; Chapter 11 filers will pay $ 1,717.00; Chapter 12 filers will pay $ 275.00; and Chapter 13 filers will pay $ 310.00. Filers must also complete a credit counseling course and debtor education course, although these may be offered for free to debtors with limited resources and income.

Debtors have the legal right to file bankruptcy without legal help; but most debtors, especially those with assets to protect, will want to hire a bankruptcy lawyer. Bankruptcy lawyers can also be very expensive. Fees will vary by jurisdiction and complexity of the case. Chapter 7 bankruptcy lawyers can charge from $500 to $3,500. Chapter 13 lawyers can charge from $2,500 to $6,000.

  • Amount of debt owed

The second consideration before filing bankruptcy is the amount of debt owed. For example, if you have $10,000 in credit card debt and it will cost you $2,000 to hire a lawyer to help discharge the debt, it could be wiser to simply create a solid budget, buckle down, get a second job and repay the debt. Not only can you save on lawyer’s fees, you can also have the satisfaction of repaying a debt.

Chapter 7 vs. Chapter 13

Not all debtors can file Chapter 7 bankruptcy. In fact, since 2005, there have been strict income requirements for Chapter 7 filers. Assuming a debtor can file Chapter 7, a trustee will be appointed to the debtor’s case. The trustee will collect all of the non-exempt assets and sell them to generate income to repay the debtor’s creditors.

Creditors are paid in the order determined by bankruptcy law. For example, the bankruptcy court is paid first, secured creditors are paid next, then priority unsecured creditors (domestic support, such as child support or alimony), then employees, and finally payment for government taxes. Other unsecured creditors are paid last.

If a Chapter 7 bankruptcy filer has enough assets to sell and generate funds, all creditors can be paid. Generally, however, there are some unsecured debts that are not paid and are discharged at the completion of bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 filers do not have their assets liquidated. In fact, filing Chapter 13 bankruptcy is one way to protect secured assets. Chapter 13 bankruptcy filers will create a three or five-year debt repayment plan and repay a portion of their secured and unsecured debts during the repayment period. Unsecured debts, such as credit card debts, which are not discharged within the allotted time frame, will be discharged at the end of the plan period.

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