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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. Read on to learn the correct way to manage credit card debt in bankruptcy.

Table of contents:

Credit Cards in Bankruptcy

There are two types of bankruptcy you can file: Chapter 7 and Chapter 13.

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 overwhelming 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.

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. Another thing to keep in mind: for those who file Chapter 7 bankruptcy, a few may have to give up assets such as their home, car, business, etc. to pay off this unsecured debt. In Chapter 13 bankruptcy, liquidating assets is not required in paying off debt. Chapter 13 is also used as a strategic tool at times to deal with emergency situations like a pending foreclosure when a solution is at hand.

Start the filing process, so you can get the fresh start you need.

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Avoiding Trouble with Credit Card Debt in Bankruptcy

A good piece of advice when you are dealing with credit card debt and bankruptcy is to know when exactly to file. If your credit card was used for unnecessary expenses within 90 days of your bankruptcy, there’s a chance that debt will not get discharged.

There is also a chance that you could get in trouble for fraudulent activity. Credit card companies can make a case to the bankruptcy court that your credit card 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.

Connect with top-rated bankruptcy attorneys to make sure you avoid issues when you file.

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FAQ

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

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A: 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.

Q:Will filing for bankruptcy negatively affect my credit score?

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A: According to FICO, those with a credit score of 700 or more may experience a decrease of at least 200 points in their score. Those with a score of 680 may only lose between 130 and 150 points. Filing for Chapter 7 bankruptcy will be on your credit report for up to 10 years. Chapter 13 bankruptcy tends to have a less negative impact since payments are being made, and therefore is on credit reports for about 7 years.

But the reality is that you can quickly rebuild your credit after bankruptcy if you do it wisely.

The credit score concern is almost hard to wrap your head around because while it will impact your credit score, those that file bankruptcy do better than those that don’t.

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.

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

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A: 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 Debt.com 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 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: It’s 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. Debt.com has partnered with some of these experts, and you can ask them by calling Debt.com 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 Debt.com’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 Debt.com help you connect with the right experts, so you can get the fresh start you need.

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About the Author

Debt.com

Debt.com

Debt.com’s writers are journalists, personal finance experts, and certified credit counselors. Their advice about money – how to make it, how to save it, and how to spend it – is based on, collectively, a century of personal finance experience. They’ve been featured in media outlets ranging from The New York Times to USA Today, from Forbes to FOX News, and from MSN to CBS.

Published by Debt.com, LLC