Credit Card Debt and Bankruptcy Laws: A Clean Slate?

Credit card debt and bankruptcy laws can be confusing to many people, especially if you've never filed bankruptcy before. Being in over your head in credit card debt is stressful and difficult enough, you are probably reluctant and nervous about delving into the legal technicalities of declaring bankruptcy. However, you may wonder if you will be able to file bankruptcy and get a clean slate on the credit card debt. The answer to this question depends on your income and personal situation.

Understanding Credit Card Debt and Bankruptcy Laws

In 2005, the federal bankruptcy code was changed, making it more difficult for individuals to qualify for a chapter 7 bankruptcy. This change to the bankruptcy laws had a profound impact on the ability of many Americans to wipe out credit card debt by filing bankruptcy. Many Americans who used to be able to file Chapter 7 are now not eligible and are left to file a Chapter 13 when their debts become too much to handle. To understand how this affects you and your ability to wipe out your credit card debt, you need to understand the difference between chapter 7 and chapter 13.

• Chapter 7 is "total liquidation" bankruptcy. Your assets are liquidated- you have to turn most of them over where they are sold. You do get to keep some things, like some home equity and your retirement accounts- but most of your stuff is sold in a bankruptcy sale. Any money generated by the sale of your stuff is distributed by a bankruptcy trustee to all of your different creditors (credit card companies are low on this list, behind other types of creditors). If there's any unpaid balance on your credit cards (and there almost always is) it is wiped away and you start fresh. You can't get rid of some debt, like student loan debt or tax debt or unpaid child support, but for the most part, this does give you a fresh start
• Chapter 13 bankruptcy is appropriate for those who can't file Chapter 7. A means test is used to determine if you must file Chapter 7 or Chapter 13. The general rule is, if you make below the median income in the state where you live or if you won't have sufficient income left over to live on if forced to pay back debt, then you can file Chapter 7... otherwise, you'll have to file chapter 13. Because it is for those with income, it is commonly referred to as the "wage earners bankruptcy." With a chapter 13, you don't get your debts wiped away- you have to enter into a repayment agreement and pay back some of the debts over a 3-5 year span of time. However, the upside is, your assets aren't taken so you get to keep your things.

Getting Legal Help

If you are filing for bankruptcy, you need to consult with a qualified bankruptcy lawyer. Your attorney can explain to you whether you are eligible for chapter 7 and can wipe your credit card debt away, or whether a chapter 13 is your only option.