Should I File for Bankruptcy for Credit Card Debt?

Yes, Bankruptcy Can Erase Your Credit Card Debt

Filing bankruptcy to erase or help manage your credit card debt can be a great way to get a financial fresh start and relieve money stress. That said, whether you should file bankruptcy entirely depends on your circumstances.

Here are some questions to ask yourself as you explore whether you should file bankruptcy to deal with your credit card debt:

• What is my total credit card debt?

• What are the interest rates on my credit cards?

• What is my total income right now? Do I think that will change in the near future?

• How much disposable income do I have each month and where is it going currently?

• What other debt do I have? 

  • Consider student loans, personal loans, medical bills, past-due mortgage or rent payments, car loans, payday loans, lines of credit, etc.

You can use a credit card payoff calculator to get a sense of how long it will take for you to pay off your debts. Though be aware of the limitations of payoff calculators.

If you’re reading this, you’re probably exploring several debt relief options. That’s a great start! It’s important to know what your choices are and their pros and cons before you decide what to do. The questions above can get you started, but you may want to consider seeing a credit counselor as well. They can help you evaluate your options by looking at your specific financial situation.

Chapter 7 and Chapter 13 Can Help With Credit Card Debt

The two types of bankruptcy that can help to clear your credit card debt are Chapter 7 and Chapter 13. Filing either Chapter 7 bankruptcy or Chapter 13 bankruptcy can clear most, if not all, of your unsecured debts (like credit card debt). 

Learn more about bankruptcy basics by reading some of our other articles:

• What Is Bankruptcy?

• What Is Unsecured Debt?

• What Is Chapter 7 Bankruptcy & Should I File?

• What Is Chapter 13 Bankruptcy?

Can I File Chapter 7 Bankruptcy To Erase Credit Card Debt?

Most people who file a Chapter 7 bankruptcy petition are trying to get rid of unsecured debts like credit card bills and medical bills. Once you file your petition, lenders aren’t allowed to take any actions to collect your debt. This is due to the automatic stay. This rule protects you while the court processes your bankruptcy case.

Most Chapter 7 filers ultimately receive a bankruptcy discharge.^[1] This relieves your responsibility to repay all dischargeable debt. Dischargeable debts are those listed below as eligible. 

Examples of debts that are eligible for a discharge in Chapter 7 include:

• Credit card debts

• Personal loans

• Utility bills

• Old rent or lease payments

• Medical bills and debts

• Federal Student Loans (private student loans may also be eligible but are often more difficult to discharge successfully)

Examples of debts that are not eligible for a discharge in Chapter 7 include:

• Alimony

• Child support

• Newer tax debt

• Legal judgments 

Due to changes in late 2022, some federal student loan debt is now easier to discharge through a Chapter 7 case. If you want to see if you’re eligible to have your credit card and student loan debt discharged, you can fill out our free screener. However, alimony and child support are never dischargeable in bankruptcy.

Are There Credit Card Debts That I Can’t Erase With Chapter 7 Bankruptcy?

In a few cases, you may not be able to discharge credit card debt. A creditor may file an objection to the debtor’s discharge through a process called an adversary proceeding.

Credit Card Debt From Luxury Goods

If you use your credit cards to charge $675 or more for luxury goods or services within 90 days of filing your Chapter 7 petition, the court may find that the credit card debt is non-dischargeable. Luxury goods and services (jewelry, art, etc.) are known as non-exempt property. These items can be sold to bankruptcy trustees to pay your creditors.

Credit Card Debt From Paying for Non-Dischargeable Debts

If you used your credit card to try to pay for non-dischargeable debts, that debt is not likely to get erased. For instance, if you use your credit card to pay child support, alimony, back taxes, or student loans, the credit card company may object to your discharge.

Do I Qualify To File Chapter 7 Bankruptcy?

If your average income is below the median income for your state and you don’t have enough disposable income, you most likely qualify to file for Chapter 7 bankruptcy. You can take the means test to check your eligibility. 

If you make more than the median income for your state or have a certain amount of disposable income, you may still qualify to file a Chapter 7 bankruptcy case. You’ll need to go through the full means test to find out.

Can I File Chapter 7 Bankruptcy Without an Attorney?

Bankruptcy attorneys specialize in bankruptcy law. Hiring a bankruptcy lawyer for your case can be helpful, but the average attorney fee for a Chapter 7 case is $1,200–$1,500. Many filers cannot afford this. The good news is that you can absolutely file a bankruptcy case without an attorney. 

Our nonprofit, Upsolve, can help you do your own paperwork and guide you through the Chapter 7 bankruptcy filing process for free! Check to see if you're eligible to use our free web app to prepare your Chapter 7 bankruptcy forms. 

Filing Chapter 13 Bankruptcy To Ease Credit Card Debt 

If you don't qualify for debt relief under Chapter 7, you might consider filing for Chapter 13 bankruptcy.

Instead of erasing your debts outright, Chapter 13 bankruptcy sets you up on a repayment plan where you make monthly payments based on your income. In most cases, you will pay a small percentage of your overall debt, and once you complete your repayment plan, the remaining credit card debt is discharged.

Chapter 13 bankruptcy can only help if you complete your repayment plan entirely. It’s important to closely evaluate your situation and be honest about your ability to commit to a repayment plan before starting it. 

What Happens if I Can’t Catch Up With My Credit Card Payments but Don’t File Bankruptcy?

If you fall behind on your credit card payments, you’ll face difficult consequences that can put you even further behind financially. The credit card company may raise your interest rate and/or charge late fees or other fees. 

These fees add up and will increase what you owe. If you get far enough behind, the company may turn your account over to a debt collector or file a debt collection lawsuit. 

Many people worry that filing bankruptcy will damage their credit score. While your credit score will take a hit if you file bankruptcy, you should be aware that missing credit card (or any other) payments will also cause damage to your credit score. And if you aren’t able to catch up on your payments, subsequent consequences like being sent to collections or sued for a debt will further damage your credit.

As with any financial decision, you’ll need to weigh the pros and cons of your options. If you want to see if you’re eligible to prepare your Chapter 7 paperwork for free with our filing app, you can check your eligibility today. If you want to talk about your options with a bankruptcy attorney, we can refer you to one for a free consultation.