How Does Bankruptcy Law Handle Credit Card Debt?

How does bankruptcy law affect your credit card debt? After all, bankruptcy is not a solution for all debts. Certain types, such as child support obligations, are not dischargeable in bankruptcy. Other kinds, such as student loans, are dischargeable only under narrow circumstances. And secured debt--such as mortgages or auto loans--can still result in the collateral property being foreclosed or repossessed, even in bankruptcy.

Fortunately, credit debt is one of the types of debt that bankruptcy is designed to handle.

Credit Card Debt is Unsecured Debt

There are distinctions among types of debt. The most important one is between secured and unsecured debt. Secured debt is secured by some asset or property, which is collateral for the debt. In the event of nonpayment, the lender can reposses the collateral; for example, in the case of a mortgage, the bank can take the house. Bankruptcy can reduce the total amount a debtor owes on secured debt, but it does not affect the security interest: the lender can still reposses or foreclose, unless the debtor agrees to continue paying. (There are some additional wrinkles, but that's the basic idea.) So bankruptcy is an imperfect solution for secured debt.

However, credit card debt is unsecured debt. There is no property securing it, which means there are no assets against which the lender has recourse.

What Happens to Unsecured Debt, Like Credit Card Debt, in a Bankruptcy

Bankruptcy gives debtors a fresh start by discharging--or eliminating--the majority of their debt. However, this relief comes at a price. Depending on the type of bankruptcy, the debtor will lose assets or lose control over his finances. In chapter 7 bankruptcy, the court will liquidate, or take or sell, the majority of the debtor's assets, using the proceeds to pay unsecured creditors as much as possible before discharging the balance. In chapter 13 bankruptcy, the court comes up with a plan (usually a five-year plan), which is in essence a court-determined--and very aggressive--budget. The debtor pays unsecured creditors as much as he can for several years, before the balance of the debts are discharged. Since credit card debt is unsecured, it can be discharged in bankruptcy.

How an Attorney Can Help

Whether to declare bankruptcyy is a complex decision--an attorney can help a debtor understand when it's a good option, as well as when it's not. Also, there are various "exemptions," or types of property and sources of income, which the debtor may not have to give up in bankruptcy; an attorney can make sure the debtor takes advantage of all the exemptions available to him.