Credit Cards: Bankruptcy and Unsecured Debt Discharge

When people declare bankruptcy, often it can almost be considered a credit card bankruptcy as credit cards are one of the primary ways people get into financial trouble. Credit cards are also unsecured, which means that unlike secured debts or non-exempt debts, credit card debt can be completely discharged by certain types of bankruptcy.

Types of Bankruptcy

There are two main types of bankruptcy, each of which will have a different effect on what happens to your credit card debt:

• Chapter 7 Bankruptcy

With Chapter 7 bankruptcy, your non exempt assets are seized. Non exempt assets include most assets, except for limited exemptions such as a portion of your home equity or your retirement accounts. These assets are sold and the proceeds distributed to creditors by a bankruptcy trustee. When your creditors get this money, this is the only payment they will get from you. All of your remaining debts are discharged - with the exception of student loan debt, tax debt and such related non-exempt debts- and you start with a clean slate.

This can be one of the best ways to totally wipe out your credit card debt. However, only certain people can qualify for Chapter 7. You generally must make below the median income in your state, or your monthly income must be unable to support both a reasonable standard of living and your debt payments. Chapter 7 will also hurt your credit a lot and can remain on your credit report for up to 10 years.

• Chapter 13 Bankruptcy

Chapter 13 bankruptcy is an option available for those who make too much to qualify for Chapter 7. Under Chapter 13, your credit card debts are not discharged. Instead, you make a list of your debt and a debt repayment plan. The court reviews the debt repayment plan and a trustee oversees your monthly payments, which you may make for as many as three to five years.

Under Chapter 13, your credit cards and other non-exempt unsecured debt may be reduced or the structure of the debts and repayment may be changed. However, the debt is not completely discharged.

Getting Help

If you are considering bankruptcy, consult with an experienced bankruptcy attorney who can provide you with more detail about both Chapter 13 and Chapter 7 and who can help you to determine what type of bankruptcy you qualify for. Your attorney can also explain to you in detail what, if any, portion of your unsecured debt is likely to be discharged or forgiven in bankruptcy.