Bankruptcy is intended to give customers who are drowning in debt a second opportunity. Many people who drastically overspend using credit cards believe they need bankruptcy. The average credit card debt in the US in the summer of 2021 was $5,400. 60 % of those who file for bankruptcy make less than $500 a week in income. If you try using that to pay for your rent, utilities, food, and transportation, then add $5,400 in credit card debt, it feels like you are drowning in debt.
Most people who declare bankruptcy do so because they are in dire need of it. They don’t engage in it because they believe it will be simple. They are struggling, and finding the best bankruptcy options for credit card debt that will enable them them to start over. Filing for bankruptcy enables them to start over, at least in cases where Chapter 7 petitions are involved. A staggering 95.3 % of Chapter 7 cases result in the discharge of unsecured debts.
Additionally, you should be aware that not everyone is eligible for Chapter 7 or Chapter 13 bankruptcy and that getting credit card debt wiped out has significant drawbacks. If your financial situation worsens again, you won’t be able to file for eight years. There will be a negative report on your credit record for seven to ten years, making it very difficult to get a loan. It’s important not to take bankruptcy options for credit card debt lightly. Numerous studies have demonstrated that those who choose bankruptcy do it because they are in serious problems. In this regard, it offers them a way out.
So, should you declare bankruptcy in order to pay off your credit card debt? Bankruptcy can help you restart your finances, but be aware of the financial costs before making that decision.
Falling Behind on Credit Card Payments
Credit card debt can lead to bankruptcy, which is pretty simple. Starting with one missed credit card payment per month, it progresses to a late fee being assessed to your account the following month. Missing payments for two consecutive months is the next step. This is the best time to review your bankruptcy options for credit card debt . The Credit Card Act of 2009 allows card companies to increase your card’s interest rates.
Additionally, they can increase the interest rates if:
1. Your credit rating declines.
2. You have had the card for longer than a year.
3. Increasing prime interest rates.
4. The initial promotional time comes to an end.
It’s not unusual for someone who is behind on payments to see their interest rate go from the national rate of 17.8% to 30%. However, the amount by which it increases varies. In reality, there is no legal restriction on card firms raising their rates further. Your credit card debt soars when the interest rate increases, late payment fees, and over-the-limit fees add to the issue. When you stop making the minimum payments, debt collection companies will start calling. Therefore, you are advised to asses your bankruptcy options for credit card debt.
Credit card debt is frequently aggressively pursued by debt collectors.They can hire a law firm that has the power to file a lawsuit against you and win rulings that include garnishing your earnings and putting liens on your property. Bankruptcy filings can halt legal actions and collection efforts. An “automatic stay”, as it’s known, stops creditors from hiring a bankruptcy attorney to take legal action against you to recover the debt. It is unquestionably one of the benefits of declaring bankruptcy.
Bankruptcy Chapter 7 for Credit Card Debt
If done correctly, Chapter 7 bankruptcy filing can eliminate all unsecured debt, including credit card debt. The following bills can be eliminated:
2. Personal loans
4. Back rent
6. Deficit amounts brought on by repossession
Child support, taxes, alimony, student loans, court judgments, and debt acquired by fraud are among the debts you cannot discharge with a Chapter 7 bankruptcy. Remember that the bankruptcy trustee will sell any non-exempt property you own and distribute the proceeds to the creditors in your case as well as the credit card companies. The typical non-exempt property includes a second home or car, art, jewelry, and other luxuries that aren’t necessities.
Exceptions to Chapter 7 Bankruptcy’s Debt Elimination Law
Chapter 7 bankruptcy can discharge credit card debt for various reasons. However, there are two main situations in which this bankruptcy options for credit card debt cannot be done:
1. Due to fraud, you accrued debt on your credit card.
2. You bought a costly item or expensive piece of jewelry using the credit card on which the creditor has a security interest.
You may have given fraudulent information to obtain the credit card, which may have led to the fraud problem. one example is using a credit card that has been altered or counterfeited to make purchases. The other one is overstating your salary on your application.
When you take out a cash advance of $1,000 within 70 days of declaring bankruptcy or use the credit card to make ‘luxury’ expenditures totaling more than $725, it is also regarded as fraud. In other words, avoid running up credit card debt if you know you will file for bankruptcy.
The second cause is uncommon but could lead to the repossession of whatever purchases you made. Your purchase of a high-end appliance, a living room set, or gold and diamond jewelry may qualify as secured debt in the eyes of your creditors. After being reviewed by a jewelry appraiser, they could request it and refer to it as ‘collateral’ which can be taken to a pawn shop in exchange for cash. You may be able to get rid of the debts associated with these acquisitions, but you cannot keep the assets.
Bankruptcy under Chapter 13 for Credit Card Debt
Unsecured debt, such as credit card debt, is assigned a very low priority under Chapter 13 bankruptcy, also known as a ‘reorganization.’ When you file for Chapter 13 bankruptcy, you give the bankruptcy trustee a plan outlining how you intend to pay off the bulk of your debts within three to five years. The following step is to order the debts by priority, starting with secured debts such as mortgages and auto loans, alimony, child support, or back taxes. Credit card debt and other unsecured debts are given the least priority.
The Chapter 13 filer then calculates how much of his current and future income will be used to repay debts over three to five years. When the last payment is completed, all debts, including credit card debt, are dismissed. This is only possible if the bankruptcy trustee accepts the plan and the client makes the required installments.
Because repaying unsecured debt is not a major focus of this bankruptcy options for credit card debt , the majority of what you owe on credit cards will likely be eliminated upon a successful discharge.
Filing Bankruptcy on Credit Cards Only
Because you must include all debts when filing bankruptcy, it is not realistic to file bankruptcy solely to eliminate credit card debt. This applies whether you file under Chapter 7 or Chapter 13.
Therefore, if you had no other bills, there are better ways to pay off credit card debt than declaring bankruptcy. These methods are not as harsh and do not have as much of a negative effect. These bankruptcy options for credit card debt include debt management and debt settlement programs.
Requirements for Bankruptcy Filing for Credit Card Debt
There are requirements to complete if you want to declare Chapter 7 or Chapter 13 bankruptcy, and most of them are made to see if a consumer can manage the debt on their own. In order to file for Chapter 7 bankruptcy, a ‘means test’ must be passed, and Chapter 13 filers are subject to tight debt ceilings that cannot be exceeded.
Chapter 7’s means test takes into account two factors. If your income during the preceding six months was less than the median income in your state for a family of your size, you could pass the test. Most filers for this bankruptcy options for credit card debt succeed in passing the means test in this manner.
If not, go to the second deliberation: Is there enough income left over after deducting costs for necessities like rent, food, transportation, clothing, utilities, etc., to pay off your debt? You will be removed from Chapter 7 and advised to file for Chapter 13 if there is enough money remaining. You can be eligible for Chapter 7 if there isn’t enough money left over.
For Chapter 13, an individual’s eligible debt cannot total more than $419,275 for unsecured debt such as credit cards and student loans. Be cautious when handling both types of debt. Your totals can surpass the limit if you’ve fallen behind on payments.
Can I Still Be Sued by Credit Card Companies After Filing for Bankruptcy?
The ‘automatic stay’ safeguard, which stops credit card firms from initiating a lawsuit against you to recover money kicks in when you file for bankruptcy.
If a credit card company’s bankruptcy attorney sued you for unpaid debt before you filed for bankruptcy and the matter hasn’t been resolved, the lawsuit cannot move forward while the automatic stay is in place. The lawsuit can only move forward when the bankruptcy court grants the card company permission. Most frequently, if you receive a discharge under Chapter 7, it will also include the discharge of judgments obtained through debt collection litigation.
Bankruptcy without Legal Representation and Credit Counseling
Even though getting rid of credit card debt through bankruptcy is simple, it is never a good idea to go by this bankruptcy options for credit card debt. You would be doing yourself a significant disservice by not hiring a bankruptcy lawyer to represent you if you lack experience with the documentation. A bankruptcy lawyer can help you cover all your bases. Additionally, a bankruptcy lawyer will help you out with timelines necessary in filing a bankruptcy case, let alone knowledge of the parts and subsections of the bankruptcy law.
Taking a pre-bankruptcy financial consulting course within 180 days of declaring bankruptcy is one of the key requirements for filing. Speaking with a credit consultation from a nonprofit financial planners will help you fulfill that commitment.
At the very least, during a credit counseling session, the counselor can assess your financial status. Moreover, he can suggest any bankruptcy options for credit card debt that might be able to alleviate your financial issues, negating the need to file for bankruptcy.
It is intended to be a potential source of relief, which is what Chapter 7 is all about. If unexpected circumstances cause your income to be stopped, balance protection insurance plan pays down the remaining credit card balance or makes monthly payments to your credit card issuer on your behalf. Additionally, if you are an honorable but unfortunate debtor and cannot pay your debts because you have lost your job, have medical expenses, or are just attempting to provide for your family’s basic needs, then you should consider filing. Bankruptcy enables you to start over.
In most circumstances, paying credit card bills is equivalent to flushing money down the drain if you’re eligible to file for bankruptcy. Stopping your credit card payments can do extra harm if you’re still unsure or think you won’t file your case for a while. The topics covered in this article discuss what you should think about before declaring bankruptcy. If you intend to file for bankruptcy yourself, extensive planning is required. Most of the time, it will be in your best interest to hire a skilled bankruptcy attorney. Additionally, if you’re concerned that you won’t be able to pay an attorney, remember that it’s typical to halt making credit card payments and use the money to do so after you’re confident you can file.