Credit card debt can prevent you from paying your day-to-day living expenses. By filing a Chapter 7 bankruptcy case, you can get rid of credit card debt while protecting your property. However, you need to qualify for Chapter 7 by having income that is below the average median income in your state.
Written by Attorney Jonathan Petts.
Updated December 28, 2020
People file for bankruptcy relief for many reasons. In most cases, the person experienced a financial hardship that resulted in the inability to repay his or her debts.
If you are struggling with debt you cannot pay, a Chapter 7 bankruptcy case might be an affordable way for you to get out of debt.
What Happens When You Get Behind on Your Credit Card Payments?
If you fall behind on your credit card payments, several things may happen. The credit card company may raise your interest rate, which means that less of your payment each month applies to the account balance.
The credit card company will charge late fees and other fees, such as over-the-balance fees which increase the amount you owe to the company. The company may turn the account over to a debt collector. A debt collector can be extremely persistent in its pursuit of the debt, including calling you at work and harassing you at home. Creditor harassment is another common reason people file a Chapter 7 case.
What is a Debt Collection Lawsuit?
When you fail to pay your credit card debt, the company may file a debt collection lawsuit seeking payment. If you receive a lawsuit for credit card debt, you have a short time to file a response to the lawsuit.
If you ignore the credit card lawsuit, the company will file a motion asking the judge for a default judgment. The default judgment states that you owe the credit card debt. In most cases, the judge allows the credit card company to add attorney fees and other costs to the debt you owe.
The default judgment is recorded at the courthouse in the county in which you live. The judgment accrues interest until it is paid in full. In most states, the judgment also attaches to any real estate that you own, or you purchase after the judgment is entered. If you sell your property, you must pay the judgment in full from the proceeds of the sale.
Other Actions a Creditor May Take After Obtaining a Judgment
State laws determine the legal steps a credit card company may take to collect a judgment debt. In some states, creditors are allowed to garnish your wages for judgments. Some states allow judgment holders to apply for supplemental proceedings to identify any personal property the judgment holder may seize to satisfy the debt.
The actions the credit card company takes to collect a judgment debt depends on the company. Some credit card companies and debt collectors pursue judgment debts aggressively. That’s because they can afford to have full-time attorneys working on their behalf. In some cases, a person could lose a substantial portion of his or her income in wage garnishments or lose property to satisfy a judgment debt.
Is Credit Card Debt A Good Reason to File Chapter 7?
Yes, Chapter 7 bankruptcy erases almost all credit card debt. So, if you owe far more than you think you can pay, Chapter 7 can likely help you get back on your feet and stay there.
If you are paying the minimum payments on your credit cards each month, it could take you 10 or 15 years to pay off the credit card debt, depending on the balances on your credit cards and the interest rate.
Paying the minimum payments on credit cards can cost you thousands of dollars that you do not have to pay. In addition, if you miss even one payment, the credit card company could raise your interest rate substantially. For most people, credit card debt is the main reason they need to seek debt relief.
Credit Card Debt is Unsecured Debt
Credit card debt is typically considered an “unsecured” debt. This means that you don’t have property securing the amount that you owe. This property would usually be traded in to repay the amount that you owe. In other words, if you do not pay the credit card debt, the company cannot repossess your property or foreclose on your home. Instead, you’re simply on the hook to pay back the money that you owe.
However, a credit card company may obtain a personal judgment by filing a debt collection lawsuit. If the company is successful in obtaining a judgment, the credit card company may take actions to collect the debt that could affect your property and income.
Are There Credit Card Debts That You Can’t Erase During Chapter 7 Bankruptcy?
In a few cases, a debtor may not be able to discharge credit card debt. A creditor may file an objection to the debtor’s discharge in some circumstances. The objection is an adversary proceeding, which is a lawsuit within the bankruptcy case.
Two reasons why credit card debt may not be dischargeable are:
Credit Card Debt for Luxury Goods
If you use your credit cards to charge $675 or more in “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 can include more than just really expensive items or property that you own. “Luxury” can mean anything that you don’t necessarily need to stay on your feet or support your dependents. Therefore, if you have charged $675 or more in credit card debt recently, you may want to wait at least 90 days from the last credit card charge to file a Chapter 7 bankruptcy case.
Credit Card Debt Incurred to Pay Non-Dischargeable Debts
If you used the credit card to pay for debts that you could not typically get rid of in a bankruptcy case, that debt won’t likely 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.
Why Do People File a Chapter 7 Bankruptcy Case?
There are many reasons to file bankruptcy. Some of the common reasons people file Chapter 7 include:
Unemployment or a temporary decrease in income
Accident injury or sudden illness that results in substantial lost wages
Medical bills that the person cannot pay
Death of a spouse or family member
Separation or divorce
Loss of a business or downturn in business
Too much credit card debt
Poor financial management skills
Foreclosures or repossessions
Debt collection lawsuits and personal judgments
The Bankruptcy Court does not judge a person for why that person needs to file for debt relief. The Chapter 7 trustee assigned to your case does not judge you either.
If a person cannot pay their debts for whatever reason, that person may qualify to file a Chapter 7 bankruptcy case if they meet the income requirements to file a Chapter 7 in their state.
Chapter 7 Gets Rid of Credit Card Debt and Judgment Debts
When you file a Chapter 7 bankruptcy petition, you include all your debts. A Chapter 7 case discharges most, if not all, unsecured debts, including credit card debts and personal judgments from debt collection lawsuits.
You receive a bankruptcy discharge when you complete your Chapter 7 case. The bankruptcy discharge relieves your responsibility to repay a debt. In other words, if a debt is discharged in bankruptcy, you are not responsible for the payment of that debt. The creditor is not allowed to take any actions to collect a discharged debt.
Examples of debts that are eligible for a discharge in Chapter 7 include:
Credit card debts
Old rent or lease payments
Medical bills and debts
Some old income taxes
Alimony, child support, and student loans are non-dischargeable debts. In a few cases, a debtor may be eligible for a hardship discharge for student loan debt. However, alimony, child support, and a few other debts are never dischargeable in bankruptcy.
Do I Qualify to File a Chapter 7 Case?
You must meet income requirements to qualify to file a Chapter 7 bankruptcy case. If your average income is below the median income for your state, you should qualify to file a Chapter 7 case. However, if your income exceeds the state median income, you may want to talk to a bankruptcy attorney.
If your average income falls below the state median income, it means you pass what’s called the Chapter 7 Means Test. If you “pass” the Means Test, you are typically eligible for a bankruptcy discharge under Chapter 7. However, if you “fail” the first section of the Means Test, you may still qualify to file a Chapter 7 case.
The second section of the Chapter 7 Means Test subtracts allowable expenses from your monthly income. The amount of money remaining after you subtract all allowable expenses is your disposable income. Individuals who do not have disposable income or who have very low disposable income may still qualify to file a Chapter 7 bankruptcy case.
So, What Happens if I Don’t Pass the Chapter 7 Means Test?
If you do not qualify for debt relief under Chapter 7, there are a couple things to consider. You can try talking to a lawyer to make sure you don’t qualify. If not, you might consider filing for Chapter 13.
Instead of erasing your debts, Chapter 13 sets you up on a repayment plan. Sometimes this makes sense if you think you’ll be able to repay your debt, but just need more time. A Chapter 13 bankruptcy is a repayment plan. You repay a portion of your debts through the Chapter 13 plan. Most repayment plans are for 60 months, but some debts may qualify for a 36-month plan.
In very few cases does a Chapter 13 debtor repay 100 percent of his or her credit card debt. In most cases, the debtor pays a small percentage of the credit card debt to his or her creditors. Once the debtor completes the Chapter 13 plan, the remaining credit card debt is discharged.
Chapter 13 bankruptcy can only help if you complete the plan. Many people can fall behind on their payments and end up back where they started. So, it’s important to be honest with yourself before you commit to Chapter 13. If you don’t, you could waste valuable time and make your situation worse.
Can I File a Chapter 7 Bankruptcy Case Without an Attorney?
Bankruptcy attorneys help individuals who need debt relief file a bankruptcy case. However, the average attorney fee for a Chapter 7 bankruptcy lawyer can be $1,200 to $1,500. In addition to the attorney fee, you must also pay the filing fee to the bankruptcy court and the fees for your required bankruptcy courses.
If you can afford to hire a bankruptcy attorney, it is usually best to do so. Bankruptcy law can be confusing when you are trying to file a Chapter 7 case without an attorney.
You can file a bankruptcy case without an attorney and although it’s great to have an attorney, it’s not always necessary. If you can’t afford to hire a lawyer, check if you're eligible to use Upsolve's free web app to prepare your bankruptcy forms
Get Help Filing a Chapter 7 Case Without Paying an Attorney Fee
Although it can seem complicated, many people who file for Chapter 7 have a pretty straightforward cases. In these easier cases, it usually makes sense to file on your own but just get help with the paperwork.
Don’t know where to start? A nonprofit like “Upsolve” might be all you need. This free legal aid nonprofit can help you do your own paperwork and give you guidance on what to expect throughout the process.
Don’t forget – Upsolve is free! The only costs you have to cover are the ones required by the court. Take their screener here to see if you qualify for their assistance!
Our unique bankruptcy software walks you through the process of filing a Chapter 7 case step-by-step. You can confidently complete your bankruptcy forms, file the forms with the bankruptcy court, and attend your bankruptcy hearing without an attorney.
In most cases, debtors receive their bankruptcy discharge within four to six months after filing their Chapter 7 bankruptcy petition.
You are required to pay the filing fee to the bankruptcy court and pay the fee for your bankruptcy courses. The filing fee is a standard fee, but you can typically locate a company that provides the bankruptcy courses online for $10 to $15 per course (you only have to complete two courses).
Credit card debt can prevent you from paying your day-to-day living expenses. The credit card companies may also file a debt collection lawsuit seeking a personal judgment if you do not pay the debt. With a personal judgment, the company may garnish your wages or take other assets depending on the laws in your state.
By filing a Chapter 7 bankruptcy case, you can get rid of credit card debt while protecting your property. However, you need to qualify for Chapter 7 by having income that is below the average median income in your state.