Chapter 7 Bankruptcy Facts: Credit Card Debts

The most significant of the Chapter 7 bankruptcy facts is that Chapter 7 bankruptcy is an excellent way to get rid of excessive credit card debt.

What is a Chapter 7 Bankruptcy?

Chapter 7 is what’s known as a “liquidation bankruptcy.” In brief, the debtor’s assets—money in the bank, investments, and property—are “liquidated,” or sold and/or cashed out, and used to pay creditors as much as possible. Once that’s done, the balance of the debts—the amount(s) unpaid—are discharged, or eliminated.

Of course, nothing is ever quite that simple. Complicating matters in the debtor’s favor is that there are various exemptions from liquidation, or types and amounts of property that are exempt from being liquidated for creditors. This helps make sure the debtor has something to start over with.

Complicating matters to the debtor’s detriment is that not all debts are equally dischargeable.

Chapter 7 Works Best on Unsecured Consumer Debt

First, there are some kinds of debt that, for matters of public policy, can’t be discharged readily. For example, alimony, child support, judgments for DUI, some tax debts, student loans—the debts that society really wants to make sure are honored.

Second, secured debts have to be paid, or else the property securing them can be taken. While the bankruptcy will prevent the creditor for suing for any remaining balance, the creditor can still foreclose (real property) or repossess (other property, like cars) on assets that are securing, or acting as collateral for, loans. So the debtor has to choose between honoring the debt and losing the property.

However, unsecured consumer debt is exactly the sort of debt bankruptcy is designed to help with. It can be fully discharged.

99%+ of Credit Cards are Unsecured Consumer Debt

Remember: unsecured debt is debt that does not have any property, assets, or amount of money securing or guaranteeing it. That describes the vast majority of credit cards. So if someone is drowning in credit card debt, they can use a Chapter 7 bankruptcy to eliminate it.

Note: there are a small number of credit cards that are secured—these are ones where the borrower had to put up some money as collateral. For those cards, the lender at least can take the collateral, even if the borrower declares bankruptcy.

How an Attorney Can Help

A lawyer can help you decide if bankruptcy is for you. The attorney can also help you determine what kind of bankruptcy (Chapter 7? Or maybe Chapter 13?) is best for you, and once you decide to file for bankruptcy, can make sure you take advantage of all the rules—like Chapter 7’s liquidation exemptions—in your favor.