As the cost of living keeps going up, more people are relying on credit cards. And because average credit card interest rates are around 20%, repaying that debt is getting harder. If you’re in this situation, you may be wondering: Should you file for bankruptcy for credit card debt?
Should You File for Bankruptcy for Credit Card Debt?
If you’re feeling overwhelmed by credit card debt, bankruptcy may be an option. However, it can come with serious consequences. Bankruptcy is usually advisable when making your minimum payments is no longer sustainable, and you’ve exhausted other options.
The decision to file bankruptcy is a very personal one. Here are some of the key factors many people consider beforehand:
- The total balance owed
- Total income and income stability
- The length of time they’ve been in debt
- The amount of stress placed on daily finances
- Whether they’re already behind on payments
Keep in mind that you may have other options. For instance, if you can qualify for a consolidation loan, you might be able to pay down your debt faster while saving hundreds (or thousands) of dollars in the process. You might also be able to use debt settlement to settle your credit card balances for less than the full amount owed.
Unfortunately, if you’re in serious debt and have missed multiple payments, you might not be able to qualify for a consolidation loan.
What Happens to Credit Card Debt in Bankruptcy?
Credit card debt is generally unsecured debt, meaning there’s no collateral involved. By contrast, secured debt comes with an asset that the lender can take if you stop paying, like a car or house.
With Chapter 7 bankruptcy, most unsecured debt is “discharged” or erased. But there’s a catch: Some of your assets may be seized and sold to pay creditors.
With Chapter 13 bankruptcy, you agree to follow a manageable payment plan for three to five years. After that, your remaining credit card debt is discharged.
Understanding Your Bankruptcy Options for Credit Card Debt
If you’re struggling with credit card debt and considering filing for bankruptcy, Chapter 7 and Chapter 13 are worth understanding.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as “liquidation” bankruptcy because assets may be sold to pay for debts. Each state sets its own rules for “exempt” assets. These are assets needed for day-to-day life, and they can’t be seized.
Most states allow filers to keep their home and vehicle (up to certain equity limits). You can also generally keep clothing, tools needed for work, furniture, appliances, and retirement accounts.
You’ll need to pass a means test to qualify. If your income is too high, you may need to declare Chapter 13 instead. The process usually takes three to five months from start to finish.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy “restructures” debts into a long-term repayment plan. Debts aren’t discharged immediately, but you also don’t have to give up any assets.
After you file and come up with a court-approved repayment plan, you’ll make payments to creditors over three to five years. Once you’ve completed your payment plan, most remaining debts (including credit card debt) will be discharged.
Can you exclude a credit card from Chapter 13? In most cases, no. However, some bankruptcy trustees might allow you to keep a card with a $0 balance open.
What Is the Best Bankruptcy for Credit Card Debt?
Chapter 7 may be the better choice if you have low income and few assets. Chapter 13 might be preferable if you have a stable income and assets you want to keep.
Pros and Cons of Filing Bankruptcy for Credit Card Debt
If you feel trapped by credit card debt, bankruptcy could offer relief. The potential benefits include:
- An automatic stay (pause) on collections as soon as you file
- Potentially having credit card debt discharged
- A timeline for resolving debt
- A clear path forward
However, there are also downsides to consider. For instance:
- Bankruptcy is a matter of public record
- It costs money to file
- You may have to give up some personal property
- Some debts (like most student loans and tax debts) can’t be discharged
- Your credit could be seriously damaged
It’s also worth noting that bankruptcy will stay on your credit report for a significant amount of time, potentially up to 10 years.
Making the Decision
Should you file for bankruptcy for credit card debt? There’s no one-size-fits-all answer. The important thing is to carefully compare your options, weigh the pros and cons of each, and choose the one that will most benefit your financial future.
FAQ
When Should You File Bankruptcy for Credit Card Debt?
It depends on your circumstances. If you don’t think you can realistically pay off your credit card balances within a few years, or you’re already behind on payments, it might be worth considering. When in doubt, consult a financial professional or bankruptcy attorney.
How Can You Get Out of Credit Card Debt?
Bankruptcy is just one option. Debt settlement may make it possible to settle your credit card debt for less than the full amount owed, saving thousands. If you can qualify for a decent interest rate, you might pursue debt consolidation. Alternatively, you can try using the snowball method (paying the card with the lowest balance first) or the avalanche method (paying the card with the highest interest rate first).
What Can You Not Do After Filing Chapter 7?
Once you file, you won’t be able to take on new unsecured debt while your case is active. You also can’t hide or give away assets to avoid having them seized and sold.
What Types of Debt Cannot Be Forgiven in Chapter 7?
Tax debts, family support obligations, and most student loans can’t be discharged. Neither can criminal fines, restitution, and settlements you’ve been ordered to pay as a result of a DUI/DWI.
