What to expect when filing for bankruptcy for credit card debt

If you find yourself drowning in credit card debt, don’t feel too bad because you’re not alone. As of mid-2023, American consumers have racked up almost $1 trillion in credit card balances, according to data from the Fed.

If this sounds like you, the good news is that you’ve got options, chief among them filing for bankruptcy for credit card debt.

Bankruptcy for credit card debt can be seen as a fresh start for people whose income isn’t enough to manage the monthly payments on the debt they’ve taken on. But it’s not a free pass.

It will cost the filer in other ways, mainly in a damaged credit profile. More on that later.

In this article, we'll answer the question, “Should I file for bankruptcy for credit card debt?” and explore both the relief and repercussions of doing so.

Bankruptcy types

First things first, is filing for credit card debt even allowed? The short answer is yes.

In fact, there’s no minimum threshold to qualify for bankruptcy protection. Whether you’ve got $3,000 or $30,000 in credit card debt, it is possible to find relief through a bankruptcy filing.

But filing bankruptcy for credit card debt is not a cookie-cutter approach. Not all filings are the same. The two types of bankruptcy filings for individuals are Chapter 7 and Chapter 13. No matter which one you choose, you are likely to find some relief for your credit card debt.

Chapter 7 bankruptcy filing

A Chapter 7 bankruptcy is known as a liquidity event, requiring filers to sell any non-exempt assets and direct the proceeds toward repaying creditors. The courts won’t just wipe the slate clean without requiring some good-faith effort on the part of the bankruptcy filer.

The good news is that the collection calls will cease and the filer won’t have to live in fear that their wages will be garnished or their assets repossessed. This is thanks to the court placing a temporary stay on all debts after the filing is submitted.

If approved, and after a period of several months, there will be a discharging of the filer’s credit card debt, basically erasing it and giving them a clean slate. They are off the hook and won’t have to make payments to creditors anymore. But like most things in life, there’s a process involved and it doesn’t happen overnight.

Before filing, you’ll want to make sure you’ll qualify. For a court to approve your bankruptcy filing for credit card debt, your income must be below a certain threshold.

To determine your eligibility, you’ll need to complete what’s known as a means test, which basically assesses your ability to pay your bills based on your disposable income.

If you don’t pass it, don’t worry. All is not lost; you still might be able to qualify for a Chapter 13 filing for bankruptcy for credit card debt. More on that in a minute.

But first, here are some additional steps for filing a Chapter 7 bankruptcy on credit card debt.

• You’ll need to engage an attorney to walk you through the filing process in the courts. If you don’t have the money for an attorney, you may be able to receive the counsel you need through a legal aid center or non-profit credit counseling firm.
• Your lawyer will also expect you to put in some effort so that you don’t find yourself in trouble again down the road. For example, they will likely expect you to attend a credit counseling course within 180 days of filing bankruptcy for credit card debt.
• There are several other steps involved too, such as documenting a list of your creditors, sending forms to a trustee and attending creditor-related meetings. After you’ve checked all these boxes, the court should discharge your credit card debts, making you free and clear of them.
• At the end of the day, however, your creditors still have a say in the matter. If they put up a fight about discharging the debt, say they weren’t thrilled you used your credit to finance a trip to the Bahamas, the court could rule in their favor. In that case, you’ll still be responsible for paying that particular credit card debt.

Credit card debt generally falls into the unsecured debt category, meaning that there’s no asset, like a piece of real estate or a house, securing the loan. According to United States Courts, the success rate on Chapter 7 filings for forgiving unsecured debts including credit cards is over 95%.

Chapter 13 bankruptcy filing

You can think of a Chapter 13 bankruptcy filing more as a reorganization of your personal finances. It’s a process that, with the help of a legal professional, will align you with a repayment plan, the payments for which are commensurate with your income and made to a trustee.

This plan could unfold over the course of three-to-five years. If you stick with the program, any remaining debts are forgiven at the end of the term. But if you go off the rails and stop making payments, you could forfeit your right to any debt forgiveness you would otherwise be entitled to.

One of the primary benefits of a Chapter 13 filing is that it protects homeowners from the threat of foreclosure. To qualify, the sum of your secured and unsecured debts must be lower than $2.75 million.

What do you lose if you file bankruptcy?

Besides perhaps taking a hit to your pride, the main thing you lose if you file bankruptcy for credit card debt is your credit score. You won’t lose it altogether, but you can expect it to take a hit.

Remember that in a Chapter 7 filing, a court-appointed trustee will assess your assets to determine what you can sell, if anything. The proceeds will be directed toward repaying creditors. So think real estate, jewelry, baseball cards, NFTs, etc. They won’t take everything, and the conditions on what is up for grabs varies depending on the state in which you live.

What other kinds of debt is forgiven with bankruptcy?

In addition to credit card debt, if you’re carrying any personal loans, doctor bills or even payday loans, the courts are likely to green-light your request for debt relief. But if you’ve got other unsecured debt, say a pesky student loan, forgiveness is harder to come by. Filing for bankruptcy and credit card debt often go hand in hand.

How much does filing bankruptcy hurt your credit?

Filing for bankruptcy for credit card debt may relieve you of your balance due but it will cost you in the way of credit. As mentioned earlier, you can pretty much expect filing for bankruptcy for credit card debt to shave hundreds of points off your credit score.

In addition, a Chapter 7 bankruptcy filing will linger on your credit report for anywhere from seven to 10 years. A Chapter 13 bankruptcy filing will stick around for as long as seven years from when you file.

So, should I file bankruptcy for credit card debt?

If you file, don’t be surprised if you run into difficulty down the road when applying for a mortgage or some other loan. But that doesn’t automatically mean filing for bankruptcy for credit card debt is the wrong move. It depends on your situation and could very well be the financial lifeline that you need to move forward.

Bankruptcy filing is a major decision

Filing for bankruptcy for credit card debt is a major decision, one that should not be taken lightly. But it’s also something that you shouldn’t feel ashamed of. Remember that combined consumer credit card balances hover in the trillion-dollar range. You aren’t the only one who found iteasy to fall into the trap of getting in over your head.

If you choose filing bankruptcy for credit card debt, it’s important to remember there is life after insolvency. It will just take time and dedication on your part.

In the end, you can use the knowledge you’ve gained to strengthen your personal finances and treat credit responsibly so that when you need it in the future, it will be there.