How Bankruptcy Can Clear Credit Card Debt
For many Texans facing bankruptcy, unpaid credit card balances are a main source of anxiety, and creditor calls. The good news is that whether you file a Chapter 7 petition or a Chapter 13 repayment plan, bankruptcy can clear credit card debt and give you relief from the constant collections efforts.
Bankruptcy Can Lead to Credit Card Debt Relief
When credit card debts begin to mount, the credit companies can become ruthless. They may:
- Raise your interest rates
- Charge late fees and over-balance fees
- Deny new card applications
- Send your account to a debt collection agency
Collection agencies can be relentless in their efforts to collect unpaid balances. They will call you at home and at work, send written demands for payment, and even try to claim repossession of your vehicle or threaten you with lawsuits. Their tactics push many Texas debtors to seek a way out of debt.
Declaring bankruptcy can lead to credit card debt relief. Credit accounts are “unsecured debt”-- meaning you don’t offer anything like your home or car as collateral to secure your loan. Most unsecured debt can be discharged through a successful bankruptcy petition. However, the process works differently depending on the type of bankruptcy you file.
How to Use Chapter 7 Bankruptcy to Clear Debt from Credit Cards
If you make less than the median income in your state ($61,874 for Texas as of the 2019 census), you can file a petition for a Chapter 7 bankruptcy. As part of your Chapter 7 bankruptcy petition, you and your attorney will list every debt you owe -- including all your credit card debt -- as of the date of the petition. The bankruptcy trustee will then review your petition and your assets. Any assets that do not fit within an exemption will be liquidated and the proceeds distributed to your creditors. Whatever credit card debt is left will be discharged, so you will no longer have to pay off the balance.
How to Pay Off Credit Card Debt in a Chapter 13 Bankruptcy
If you have too much income to qualify for a Chapter 7 bankruptcy, you can still get credit card relief using a Chapter 13 bankruptcy repayment plan. Instead of using your existing assets to pay off your debts, a Chapter 13 bankruptcy consolidates what you owe into monthly payments made over three to five years based on your disposable income (beyond reasonable living expenses). Those payments are made to the bankruptcy trustee who distributes it among your creditors -- including the credit card companies -- according to the priority included in your budget. At the end of the repayment period, any dischargeable debts still left unpaid are discharged and the payments end.
What if Debt Has Already Gone to Collections?
Often, you may not begin considering bankruptcy until after your credit card debt or other debts have already gone to collections. It may be the creditors’ collection efforts that sends you to a bankruptcy attorney. The good news is that filing a bankruptcy petition can put a stop to those collections calls. Every bankruptcy filing triggers an automatic stay on collections efforts. As soon as the credit card companies learn you have filed for bankruptcy, they must go to the bankruptcy trustee, not you, to collect their debts.
This also applies to collections lawsuits filed by the credit card companies to collect outstanding credit card debts. Those lawsuits are put on hold until your bankruptcy is finished. If there is anything left to collect, they will continue after the final discharge. Otherwise, they will be dismissed. On the other hand, if a creditor has already received a judgment against you for outstanding credit card debts before your bankruptcy is filed, that judgment creates a “secured” debt, like your mortgage or car loan. It will survive your Chapter 7 bankruptcy, but it may be paid off through liquidation or as part of your Chapter 13 payment plan.
Should You Pay Off Credit Cards in Anticipation of Bankruptcy?
In one word, no. Once you know you will be filing for bankruptcy, you may want to stop making your minimum credit card payments in favor of paying off higher priority debts, like your mortgage. This will negatively impact your credit score. However, you will need to rebuild that anyway after your bankruptcy is complete. By prioritizing secured debts and utilities that you need for day-to-day living, you can make sure your family is provided for even as your bankruptcy attorney prepares your petition for filing.
At the same time, you should avoid using your credit cards in the months leading up to bankruptcy as well. Though creditors like credit card companies rarely object to a debtor filing bankruptcy, when they do it is most often a “luxury goods” objection. If you buy luxury goods or services costing more than $675 within the 90 days leading up to your Chapter 7 bankruptcy petition, a creditor can object to the discharge of that debt. Then it is up to you and your bankruptcy attorney to show why the purchase was necessary. If you can’t, then the cost of those luxury goods will not be discharged and you will still owe that debt after your bankruptcy is over.
I’m Attorney Patrick T. Williams, and I have been helping Houston-area debtors get relief from credit card debt and debt collectors through bankruptcy for over 20 years. I know how to use bankruptcy to stop the collections calls and satisfy or discharge your credit card balances. If you are considering bankruptcy, please call me or fill out an online consultation form to get help deciding if bankruptcy is the right relief for you.