Why Credit Card Companies Hate Bankruptcy Law

What happens to anything you owe on your credit cards in bankruptcy?

The debt is typically settled for a fraction of what it's worth before being wiped out. That is why credit card issuers hate bankruptcy.

The Basics of Bankruptcy

Bankruptcy is a legal process that gives debtors a fresh start by allowing them to "discharge"-or eliminate--outstanding debts. Giving debtors a fresh start is not free, however--though the cost is largely borne by creditors, who will not receive the full amount owed. Bankruptcy ideally provides that creditors are paid something--as much as possible--but by the time most people declare bankruptcy, they are in dire financial straights.

In Chapter 13 bankruptcy, a multi-year payment plan will be developed, which should see debtors paying creditors at least a portion of the debt over time. However, if a debtor has only limited income, the payments might be very small. Similarly, Chapter 7 bankruptcy should see most of the debtor's assets (less any that are specifically exempt, or protected, under law) liquidated for the benefit of creditors. However, many banktrupt debtors have few valuable assets. In either event, a lucky creditor may receive dimes on the dollar; many will receive pennies on the dollar, if anything.

The Only Debts That Have Meaningful Recourse

Leaving aside a small number of debts, like child support obligations, which legally can't be discharged in bankruptcy, the only debts that have protection in bankruptcy are secured debts. These are debts where there is some property acting as collateral for the debt--like a mortgage or most car loans. When a debtor, even a bankrupt one, doesn't pay a secured debt, the lender can foreclose or repossess; that's not as good for the lender as being paid the agreed-upon amount, but getting the property is still better than nothing.

Credit Cards Are Unsecured

However, unsecured debts can be wiped out almost in their entirety. And credit cards--except for a very small number of credit cards secured by a cash deposit, which are typically given to bad credit risks--are unsecured debts. As such, they are unprotected. That means that if a card holder declares bankruptcy, the card issuer may end up with nothing.

How an Attorney Can Help

Bankruptcy can be complicated. An attorney can help you determine if it's your best option; know which type of bankruptcy is best for you; make sure you take advantage of all possible exemptions, to protect as much of your property as possible; and deal with any challenges or objections by creditors.