Credit card debt can cause heavy financial stress when it gets out of hand. Bankruptcy offers a way to address overwhelming debt, but its impact on credit card debt depends on the type of bankruptcy filed.
If you are considering bankruptcy, it is important to understand what will happen to your credit card debt and your future credit options.
Chapter 7 bankruptcy
In Chapter 7 bankruptcy, you liquidate your assets to pay off debts. The court appoints a trustee to oversee this process. You must sell non-exempt assets and use the proceeds to pay your creditors. Credit card debt is a type of unsecured debt that often gets discharged. This means you are no longer responsible for paying it. However, certain types of credit card debt, such as those incurred through fraud, may not be eligible for discharge.
Chapter 13 bankruptcy
Chapter 13 bankruptcy involves a repayment plan instead of liquidation. You are responsible for proposing a plan to repay your debts over three to five years. The court must approve this plan, which allows you to keep your assets. Credit card debt is part of the repayment plan, but the amount paid back depends on your income, expenses and the total debt owed. Some credit card debt may still be eligible for discharge after completing the repayment plan, but you will need to adhere to the court-approved payment schedule.
Impact on credit score
Both Chapter 7 and Chapter 13 bankruptcy affect credit scores. Chapter 7 bankruptcy remains on a credit report for ten years, while Chapter 13 stays for seven years. This impact makes it difficult to obtain new credit or loans immediately after bankruptcy. However, many individuals find financial relief through bankruptcy, allowing them to rebuild their credit over time.
Debts that are ineligible for discharge
The bankruptcy process will not discharge all types of credit card debt. Debts incurred due to fraud, luxury purchases or cash advances shortly before filing for bankruptcy will remain. The court scrutinizes these types of debt closely. If the court determines that you intentionally incurred the debt without the ability to repay it, it will not discharge it.
According to the U.S. Courts, there were 452,990 total bankruptcy filings in the year ending December 2023. This figure illustrates that many people are capable of overcoming their credit card debt through bankruptcy.