The good news for debtors is that a Chapter 7 Bankruptcy will discharge, or eliminate, all credit card debt.
What Happens in Chapter 7
Chapter 7 is a “liquidation” bankruptcy. The bankruptcy court takes a look at the filing debtor’s assets—her money in bank accounts, her real estate holdings, her home, her personal property…everything she owns, with the exception of property that is specifically exempt, or protected, from liquidation under law.
The debtor’s assets—less those that are exempt—will be liquidated for the benefit of creditors. The creditors will be paid as much as possible, then the remaining debts will be discharged. This gives the debtor a fresh start, while letting creditors recover as much as possible.
Why Credit Cards are Discharged in Bankruptcy
The major distinction between types of debts is between “secured” and “unsecured” debts. A secured debt is one that has collateral: there is some asset or property guaranteeing payment. A mortgage is the classic example of a secured debt—fail to pay the mortgage and the bank can take your house. Secured debts are a little more complicated in bankruptcy, since unless the debtor “affirms” the debt, or agrees to keep paying it, the lender can take the collateral.
However, credit cards are unsecured debt: there is no property guaranteeing them. They also are not one of the few types of debts which, for public policy reasons, can’t be discharged in bankruptcy. In short, credit card debt is perfect for bankruptcy.
How an Attorney Can Help
Remember, some property is exempt in bankruptcy. An attorney can make sure that a bankrupt debtor takes full advantage of all the exemptions she’s legally entitled to, so she can keep as much of her assets as possible.
