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Should I File for Bankruptcy for Credit Card Debt?

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In a Nutshell

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. But to qualify for Chapter 7, your income needs to be below the average median income in your state.

Written by Attorney Jonathan Petts
Updated October 1, 2021

People file for bankruptcy relief for many reasons. In most cases, the person experienced a financial hardship that resulted in the inability to repay their debts. If you are struggling with debt you can't 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 less of your payment each month applies to the account balance. They can also charge late fees and other fees, like over-the-balance fees which increase the amount you owe. The company may also turn your account over to a debt collector. Debt collectors can be extremely persistent in their pursuit of the debt, including calling you at work and harassing you at home. Creditor harassment is another common reason people file Chapter 7 bankruptcy cases.

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 your creditor sues you, 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 your local county courthouse. 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 purchase after the judgment is entered via a lien. If you sell your property, you must pay the judgment in full from the proceeds of the sale.

Actions a Creditor May Take After Getting 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 also 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 will depend 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 their 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 rates.

Paying the minimum payments on credit cards can cost you thousands of dollars that you don't have to pay. Also, 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 unsecured debt. This means that you don’t have property securing the amount that you owe. Contrast this with a secured debt like a mortgage. If you defaulted on your mortgage, your lender could take your home or property through foreclosure to repay the amount that you owe. But with unsecured debt like credit card debt, if you don't pay, 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.

That said, a credit card company can get a personal judgment by filing a debt collection lawsuit. If the company is successful in obtaining a judgment, the credit card company may take action 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.

Your credit card debt may not be dischargeable if you used the credit card to purchase luxury goods or to pay for non-dischargeable debts.

Credit Card Debt for 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 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. So, 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.

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Why Do People File Chapter 7 Bankruptcy?

There are many reasons to file bankruptcy. Some of the common reasons people file Chapter 7 include:

  • Unemployment or a temporary decrease in income

  • An accident, injury, or sudden illness that results in substantial lost wages

  • Medical bills that the person can't 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 won't judge you or your reasons for needing debt relief. The Chapter 7 trustee assigned to your case won't judge you either. If you can't pay your debts for any reason, you may qualify to file a Chapter 7 bankruptcy case if you meet the income requirements in your 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

  • Personal judgments

  • Utility bills

  • 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. But 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. But 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. But even 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 don't have disposable income or who have very low disposable income may still qualify to file a Chapter 7 bankruptcy case.

What happens if I don’t pass the Chapter 7 Means Test?

If you don't qualify for debt relief under Chapter 7, there are a couple of 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 all their credit card debt. In most cases, the debtor pays a small percentage of their credit card debt to their 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 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 Chapter 7 Bankruptcy Without an Attorney?

Bankruptcy attorneys help individuals who need debt relief file a bankruptcy case. But the average attorney fee for a Chapter 7 bankruptcy lawyer is $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.

That said, you can file a bankruptcy case without an attorney. 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 pretty straightforward cases. In these easier cases, it usually makes sense to file on your own and just get help with the paperwork.

Don’t know where to start? A nonprofit like Upsolve might be all you need. We can help you do your own paperwork and guide you through the process. Don’t forget – Upsolve is free! The only costs you have to cover are the ones required by the court. 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.)

Let’s Summarize...

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 don't 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. But you need to qualify for Chapter 7 by having an income that is below the average median income in your state. If you have a simple case, Upsolve can help you file for free.

Written By:

Attorney Jonathan Petts


Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and Board Chair of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in... read more about Attorney Jonathan Petts

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