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Bankruptcy and Credit Card Debt
One of the most common ways for people to get into financial trouble is by accumulating too much credit card debt. Credit card debt can result from unexpected necessary expenditures, such as medical bills or car repairs, or it can be the result of poor credit management. This year’s State of Credit Report by the credit bureau Experian shows that Generation X and the Millennial Generation are particularly likely to accumulate a large amount of debt, carry a high credit balance, and be slow to pay their bills. Because credit card debt is often at very high interest rates, a moderate amount of credit card debt can quickly grow into an unmanageable amount of debt.
If you have a large amount of credit card debt, declaring Chapter 7 or Chapter 13 Bankruptcy may be an option to discuss with your Bay Area Bankruptcy Attorney.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy allows debtors to eliminate many types of unsecured debt, debt that is not accompanied by a collateral property interest. In most instances, credit card debt will fall into this category. However, in some rare situations, a credit card lender could have a property interest in items bought with the credit card. This would be most likely if the credit card debt is from a store card (ex. Sears), if the card is a “secured credit card,” or if the credit card was connected to a home equity line of credit.
Upon declaring Chapter 7 Bankruptcy, a debtor will immediately become protected by bankruptcy’s automatic stay provisions. This means that the credit card company and any collection’s agencies assigned to the credit card debt are prohibited from attempting to collect on the debt. If the debtor qualifies for Chapter 7 Bankruptcy, their non-exempt cash and property will be given to their creditors. Because of this, Chapter 7 Bankruptcy may be a good choice for individuals who have large amounts of credit card debt and few assets.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy can also help an overwhelmed debtor to reduce their credit card debt. Chapter 13 Bankruptcy reorganizes debt by putting debtors on a payment plan based on their disposable income. After payment according to the plan for three or five years, many of the debtor’s unsecured debts, such as credit card debt, will be discharged. In addition, secured debts may be reduced or “crammed down” to the value of the collateral.
Unlike Chapter 7 Bankruptcy, Chapter 13 Bankruptcy does not require liquidation of the debtor’s assets. Because of this, Chapter 13 Bankruptcy may be a good choice for an individual with substantial assets who also has a large amount of credit card debt and needs to reduce their monthly payments.
Credit Card Debt that Cannot be Eliminated in Bankruptcy
Certain types of credit card debt cannot be discharged in bankruptcy. In addition to the secured types of credit card debt mentioned above, credit card debt that is the result of fraud also cannot be eliminated in bankruptcy.
Although not a complete list, a Bankruptcy Court may look to any of the following to find that fraud has occurred:
- Large purchases totaling more than $650 to any single creditor made within 90 days before filing for bankruptcy;
- The debtor lied about their income on their credit card application;
- A cash advance of more than $925 within 70 days of filing bankruptcy;
- After discussing bankruptcy with an attorney, the debtor made substantial credit card charges before filing;
- Other misuse of the credit card, such as unusual spending shortly prior to bankruptcy.
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