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How to Deal with Credit Card Debt in Bankruptcy » Bankruptcy » How to Deal with Credit Card Debt in Bankruptcy



Realizing that you cannot pay off credit card debt can be gut-wrenching. Minimum payments go mostly towards covering accrued monthly interest charges, while the principal barely gets touched. You have no extra disposable income and have no way of getting ahead in payments.

Bankruptcy can be a way to regain control of your personal finances and create a fresh start. This guide explains what happens to your credit cards if you decide to file, and how filing can affect your future credit prospects.

Credit Cards in Bankruptcy

By and large, most credit card debt can be discharged by filing for bankruptcy. The way these balances get discharged depends on which type of filing you make – Chapter 7 or Chapter 13.

Credit card discharge through Chapter 7

Chapter 7 bankruptcy ensures that almost all credit card debt gets erased. This is the best option to file for if you absolutely think you cannot pay off your debt in a timely manner, or if you owe more money than you can reasonably afford to repay. The vast majority of people that file bankruptcy file Chapter 7 and have their debt eliminated in about 90 days, tax-free.

In order to file Chapter 7 bankruptcy, you must meet income requirements. In other words, if you make less income than the average income for the state you live in, you most likely will be able to file. Note that if your income surpasses the state’s average income, you may need to get advice from an expert.

What happens to the credit card accounts on your credit report?

Filing for bankruptcy and receiving a discharge will not remove any accounts from your credit report. Instead, they will be noted as “discharged through bankruptcy.”  While Chapter 7 filing will be noted in the public records section of your credit report for ten years, the accounts will be removed after seven.[1]

Credit card discharge through Chapter 13

Chapter 13 bankruptcy is more along the lines of a repayment plan. To file Chapter 13 bankruptcy, you will have to pay back a portion of your debts on a schedule. This takes between 36 months and 60 months. Chapter 13 bankruptcy is the best option to file if you cannot pay back all your debt but do not qualify for Chapter 7.

You may also choose Chapter 13 if your assets do not qualify for exemptions in Chapter 7. If you don’t want to lose your car, home, or other assets to discharge credit card debt during your bankruptcy, then you may choose to file Chapter 13.

What happens to the accounts on your credit report?

As you work your way through a Chapter 13 repayment plan, the accounts included in your bankruptcy will be noted as “included in bankruptcy.” After the three to five years when you complete the payments and receive a discharge, the status will be updated to “discharged through bankruptcy” for the remainder of the seven years. The Chapter 13 filing itself will also be removed from your credit report seven years from the filing date.[1]

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Avoiding Trouble with Credit Card Debt in Bankruptcy

Ensuring that as much of your credit card debt can be discharged is all about timing. If your credit card was used for unnecessary expenses within 90 days of your filing date, there’s a chance that balances will not get discharged.

There is also a possibility that you could get in trouble for fraudulent activity if you run up balances just before you file. Credit card companies can make a case to the bankruptcy court that your debt was fraudulent if you made luxury purchases of $600 or more in the 90 days before you filed. Such luxury goods can include things like:

  • Unnecessary upgrades to your house
  • Expensive cars
  • Jewelry
  • Indulgent spa treatments

However, if you use your credit card for necessary expenses that you simply cannot afford on your income, the debt will be discharged.  Examples include essential car or house repairs, gas, medical bills, groceries and other things you or your dependents need to survive.

The best course of action is to talk to a local bankruptcy attorney that is licensed in your state. They typically offer free consultations and can help you come up with the best timeline to file.

Be careful with cash advances before filing

Cash advances on your credit card can also be a negative factor when you file for bankruptcy. The debt is not discharged if you take out over $950 in cash advances 70 days prior to filing for bankruptcy. This stands regardless if you use that advance for essentials or luxury purchases.

There is an exception for the cash advance penalty. For example, let’s say you took out a cash advance to repay student loans. You then get diagnosed with a severe medical condition that renders you unable to work, so you file for bankruptcy. Because you are unable to repay this debt due to extreme hardship, it will be discharged. Note that if you took out the cash advance to pay your student loans intending to discharge the debt in bankruptcy, you can be sued for nondischargeability.

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Bankrupcty & Credit Cards FAQ

Will my credit cards be taken away when I file for bankruptcy?

Not necessarily, especially if you have credit cards with zero balances on them. However, it also depends on where you live: some bankruptcy courts or trustees may ask you to turn them in. Be mindful that because you do have to list all debts and creditors on bankruptcy papers, those cards will most likely be cancelled by the credit card company anyway. The credit cards are the property of the creditor and they alone have the ability to continue the card afterwards. But surprisingly, after your bankruptcy is discharged you will immediately start to get new credit offers from creditors.

If I paid my income taxes with my credit card, can that debt be discharged in bankruptcy?

This depends on a few factors. When you filed the return, when the income taxes were assessed and whether the IRS or state government acquired a lien will determine whether the income taxes are dischargeable. The more recent the income tax debt is, the more likely that debt will not be discharged. The older the debt, the more likely that debt can be discharged.

What happens if I run up my credit card balances before filing for bankruptcy?

As mentioned earlier, this could be considered fraud, especially if you have no intent of paying this off. Remember, $600 or more in luxury purchases made in the 90 days before filing and over $950 in cash advances made in the 70 days prior to filing for bankruptcy will not be discharged.

However, if you can prove that the recent purchases are necessary items, such as heat for your home and medical expenses, those may qualify for discharge.

A bankruptcy question from a reader…

Question: In 1997, I declared bankruptcy after a terrible divorce. I was doing fine until I got laid off a few years ago. My problem is, when I’m under stress, I like shopping therapy. It never really works but I keep doing anyway.

Even though I have a wonderful new job, it doesn’t pay what my old one did, and I have more than $20,000 on various credit cards. I’m getting angry calls from debt collectors, and the stress is making me lose my hair — literally!

So I’m considering bankruptcy again. I hear the law has changed, but it’s hard to figure it out by searching the Internet. Can you give me some advice?

— Vanessa in Tennessee

Howard Dvorkin CPA answers…

More so than any other financial topic, bankruptcy is both complicated and depressing. Think about it: Mortgages are also complex, but after you navigate the process, you own a house!

Bankruptcy, however, is simply a “fresh start,” says the federal government. Unfortunately, the government’s explanation of the process isn’t exactly user-friendly — it’s called “Bankruptcy Basics,” but it looks like this. Not very basic, is it?

So here are three crucial things to know, Vanessa…

1. Chapter and verse

Most people only ever hear about two kinds of bankruptcy, although there are more: Chapter 7 and Chapter 13.

The former is much more popular — about twice as many Americans filed Chapter 7 than Chapter 13. Why? Because Chapter 7 is called “liquidation.” Essentially, your assets are sold off to pay whatever debts can be covered. The rest of your debts are forgiven.

Meanwhile, Chapter 13 is often called “debt adjustment.” Why? Because a bankruptcy judge creates a plan for you to pay back your debts. Now, I know what you’re thinking: “Why would I choose to pay something back if I can simply walk away debt-free?”

Like everything else in bankruptcy, the answer is:It depends. For example, under Chapter 13, you can keep all your property. Don’t have any? Then Chapter 7 is probably the best.

2. What a “means test” means

When you sought bankruptcy protection, Vanessa, the law was different. That was before 2005 when Congress created something called a means test. Basically, someone else — appointed by the bankruptcy court — studies your financial situation and decides if you even qualify for Chapter 7 or 13.

Bottom line: Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), it is indeed harder to declare bankruptcy today than it was before 2005.

3. There’s good news

While the government has made bankruptcy more complicated than it once was, the private sector has stepped in to make it easier. has partnered with some of these experts, and you can ask them by calling at .

Also, I don’t want to end my reply without addressing something you said in passing. While we talked a lot about bankruptcy law, there’s another called the FDCPA — short for Fair Debt Collection Practices Act. It protects you from harassing debt collectors. I urge you to read about that in’s Collector Harassment Guide, where you can also sign up for help in ending any harassment you’re facing.

If you are unsure of what to do with your credit card debt, you may want to consider credit counseling first. You can get a free debt and budget evaluation and discuss options for getting out of debt with a certified expert.

Ready to file? Let help you connect with the right experts, so you can get the fresh start you need.

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