Credit Card Debt in Bankruptcy

How Credit Card Debt is Addressed in a Personal Bankruptcy Case


How credit card debt is handled in a bankruptcy case depends upon numerous factors.  First, the kind of bankruptcy case plays a large part in determining how credit card debt will be treated in bankruptcy.  Generally, individual consumers file bankruptcy petitions under chapter 7 or chapter 13 of the United States Bankruptcy Code.  Second, whether a debtor has non-exempt assets available for distribution to creditors may also play a part in determining whether the holders of credit card claims are paid anything.  Third, the type of charges made to the card and the timing of those charges can affect whether credit card debt is dischargeable.

Credit Card Debt in a Chapter 7 Bankruptcy Case

Chapter 7 bankruptcy is a form of liquidation.  In the case of a business, liquidation would mean that the debtor’s assets would be sold and distributed to its creditors.  The same is true of consumer debtors except that consumers can apply exemptions to protect certain of their property from the reach of their creditors.  Depending on the exemption law applicable to a debtor (which varies from state to state), a debtor may be able to elect from the exemption scheme set forth in the Bankruptcy Code or to use state exemptions.  While most facets of bankruptcy law are controlled by Federal law, Congress left it to the states to determine whether debtors could choose between state and Federal exemptions.  Congress also gave states the power to compel debtors to accept either the state or Federal exemption scheme, leaving them without a choice.  In any event, all states allow debtors to exempt some of their property and, for many debtors, there is no non-exempt property available for distribution to unsecured creditors.  When this happens, credit card companies are not paid any distribution.

Credit Card Debt in a Chapter 13 Bankruptcy Case

A debtor in a chapter 13 bankruptcy case attempts to repay its creditors some or all of what they are owed over a period of 3 to 5 years.  Generally, debtors pay their mortgage and car payments and certain other obligations through a chapter 13 plan.  Debtors report their monthly expenses and pay their disposable income into their chapter 13 plans.  If a debtor’s disposable income is more than enough to pay secured and priority claims, the holders of unsecured claims, including credit card claims, may receive some distribution.  In addition to the requirement that debtors pay their disposable income into their chapter 13 plans, such debtors must also satisfy the liquidation analysis test.  Said differently, a debtor must demonstrate that, after application of exemptions and giving affect to certain costs, that creditors would fare better under its chapter 13 plan than if the debtor’s property were liquidated in a case under chapter 7.  Often, that means increased plan contributions which could result in a distribution to the holders of credit card claims.

Certain Types of Credit Card Charges Give Rise to Dischargeability Issues

Bankruptcy lawyers are prohibited from advising their clients to incur credit card debt in advance of filing a bankruptcy case.  Additionally, charges for luxury goods incurred within the 90-day period preceding the filing of the bankruptcy case are presumptively non-dischargeable if they exceed $650 to a single creditor.  Likewise, cash advances of more than $925 from any creditor within the 70-day period preceding the filing of a bankruptcy case are also presumed non-dischargeable.

To determine whether your credit card debt would be dischargeable in bankruptcy case, contact an experienced bankruptcy lawyer for a free initial consultation.

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