Always consult a licensed and qualified attorney to seek specific advice for your individual needs. This article is intended to provide general info, and should not be relied on in lieu of seeking legal advice
Paying off credit card debt can become overwhelming and, over time, become an unbearable burden with no end in sight. For those facing unmanageable debt, bankruptcy may seem like an easy way out. It is a process designed to relieve debt and offer a fresh start to those who go through the process; however, some significant, long-term effects on credit are essential to understand before filing for bankruptcy. Exploring all options and understanding the complex bankruptcy process is an essential first step. This article focuses on credit card debt, bankruptcy basics, and alternative options for those facing severe credit card debt.
Bankruptcy
Bankruptcy is a legal proceeding through the federal court system available to people who cannot repay their debts. The process is started when a debtor or creditor files a bankruptcy petition. The debtor files most bankruptcy petitions. It is uncommon for a creditor to file on behalf of a creditor. However, it is an option for creditors to do so. Bankruptcy laws are in place to help individuals or businesses who cannot repay their debts. It also gives creditors a chance to receive some repayment.
How Bankruptcy Works
Before filing for bankruptcy, the first step is determining eligibility. Eligibility involves a means test evaluating all assets and liabilities belonging to the debtor. Eligibility will also determine which type of bankruptcy to seek and whether a debtor can file for Chapter 7 or Chapter 13. Following eligibility criteria, forms must be submitted to the bankruptcy court then a bankruptcy trustee is assigned to work on the bankruptcy case throughout the process. A bankruptcy trustee collects payments, monitors activity, and reports to the court. A trustee will also help determine which assets a debtor can liquidate to help pay off debt and if any exemptions are applicable to protect assets belonging to the debtor. The process also includes meetings with creditors and debtors under oath and court-required expectations for the debtor to fulfill.
Credit Card Debt
Credit card debt is considered revolving debt that can go on forever as long as the amount owed does not exceed the credit limit on the account. Unsecured debts like credit cards are not attached to collateral. Credit card companies cannot seize any property for payments the credit card company does not receive. Credit card debt accrues monthly interest on any outstanding balance. Revolving debt can quickly become an issue due to high-interest rates, ease of availability, and the initial months of leniency offered when debtors fall behind on credit card payments.
Debt Collection
When accounts become severely past due, they are typically sent to “collections.” Collections may begin through an internal collections department. Internal collections departments are first-party debt collectors. The original creditor seeks repayment for overdue accounts owed directly to them. When accounts are left unpaid for several months, a creditor may sell the account to a third-party debt collection agency.
Debt Collection Lawsuit
A debt collection lawsuit is filed against a consumer by a creditor. When the suit is filed, the debt collector sues the debtor for the debt owed.Debt collection lawsuitsare expensive and time-consuming; therefore, they are rarely filed by the original creditor. It is more common for third-party collection agencies that buy delinquent accounts from creditors to sue individuals for debt collection. For example, third-party collections agencies often purchase debts and sue for unpaid medical bills, auto and student loans, and credit card debt. As a result, consumers facing lawsuits for excessive credit card debt may consider bankruptcy as an option to stop the lawsuit.
Filing for Bankruptcy – Chapter 7 and Chapter 13
Bankruptcy is an appealing process for those who want a debt-free financial fresh start. There are some debts not covered when debtors file for bankruptcy. These include taxes, child support, money owed due to a divorce or separation, debts to the government, and student loans. Bankruptcy covers consumer debts that qualify under the chapter being filed.
Under the United States Bankruptcy Code, there are six types of bankruptcy. Chapters 7, 9, 11, 12, 13, and 15. The two most common types used for credit card debt are chapters 7 and 13. Understanding the bankruptcy chapters and how they apply to you is a critical part of the bankruptcy process.
Chapter 7 Bankruptcy for Credit Card Debt
Chapter 7 bankruptcy is also often referred to as liquidation bankruptcy because debtors may be required to sell some of their assets to repay debts owed to the creditor. This type of bankruptcy is available for individuals or businesses.
Chapter 7 bankruptcy includes two types, an asset case, and a no-asset case.
- Chapter 7 Asset Case: the debtor owns assets and can sell the assets to help pay creditors
- Chapter 7 No-asset Case: the debtor owns no assets, including valuables, property, or cash.
A successful filing of chapter 7 bankruptcy will help debtors discharge the following types of debt:
- Credit card debt
- Medical bills
- Lawsuits
- Overdue utility bills
- Lease obligations
- Contract obligations
Chapter 13 Bankruptcy for Credit Card Debt
Chapter 13 bankruptcy is only available to thos filing as individuals or sole proprietors. It is considered a reorganization bankruptcy because, through the process, debtors must restructure debts and develop a repayment plan. Future income is part of the plan for partial or complete repayment to creditors. A debtor must have verifiable, regular income within a certain income bracket and attend credit counseling to qualify for a Chapter 13 bankruptcy. Those who do not earn enough income or have irregular income do not qualify. Chapter 13 bankruptcy qualification is also dependent on secured and unsecured debt amounts. Unsecured debt, such as credit card debt, must be under $383,175 in total value, and secured debts, like auto or home loans, must be under $1,149,525 in total value.
With a successful filing of a Chapter 13 bankruptcy, many unsecured debts can be discharged, such as credit card balances, personal loans, medical bills, and utility payments. Long-term debts such as mortgages, government-funded educational loans, alimony, child support, and taxes are not eligible for discharge.
Chapter 7 vs. Chapter 13 Bankruptcy
A significant difference between Chapter 7 and Chapter 13 bankruptcy includes asset retainment. With a Chapter 13 bankruptcy, debtors can keep their assets. In contrast, Chapter 7 requires the liquidation of assets. Another difference involves the amount of time it takes to complete the process. For example, a chapter 7 bankruptcy is much faster. Debtors can typically achieve a discharge of their debts in under six months. The process of filing a Chapter 13 bankruptcy is three to five years.
A Chapter 7 bankruptcy is less expensive than a Chapter 13 bankruptcy, and those filing Chapter 7 are at a higher risk of losing their home and other assets. Chapter 7 allows debtors to discharge their debts altogether. Chapter 13 requires repayment in full for priority, secured debts, and partial repayment for unsecured debts like credit card debt.
Bankruptcy Lawyer
Those considering bankruptcy are already in financial trouble, so hiring a lawyer may seem out of reach. In reality, hiring a bankruptcy lawyer may be the best option. The benefits of hiring a bankruptcy lawyer outweigh the costs. Bankruptcy lawyers are trained negotiators who can help minimize negative impacts on credit ratings and maximize the protection of assets. Also, a bankruptcy lawyer will help iron out any questions concerning which type of bankruptcy to file. Another advantage of hiring a bankruptcy attorney is reducing or eliminating calls from collection agencies. For example, many bankruptcy attorneys will allow installment payments; filing a bankruptcy petition with a lawyer often comes at a fairly reasonable cost.
How Does Bankruptcy Affect Your Credit?
Bankruptcy remains on credit reports for up to ten years after filing. Those filing for bankruptcy can expect a drop of up to 200 points on their credit report. Although credit scores will drop, starting to rebuild credit immediately following a bankruptcy filing is possible. Making on-time payments and maintaining reasonable credit balances will help rebuild good credit. Bankruptcy will only ruin credit for a while. However, it will significantly impact credit ratings short term.
Some short-term effects on credit involve home loans. A two-year waiting period is in place following a bankruptcy filing before a home loan can be approved. Applying for credit cards or lines of credit must wait until bankruptcy proceedings are complete and discharged. Most experts recommend waiting a year after bankruptcy before applying for loans.
Alternative Options
There are several options for debt relief, including debt consolidation, credit or financial counseling, debt management, creating a more manageable budget, and bankruptcy. Other options are contacting creditors and negotiating better repayment terms or using savings to pay off more considerable amounts of debt. In addition, homeowners may have the opportunity to use their home equity line of credit to repay overdue debts.
Working with a financial advisor can help those struggling with debt create a workable budget and can help increase accountability for those struggling with financial discipline. Finally, finding ways to increase income and decrease spending with a concentrated effort to repay debt can help empower those considering bankruptcy to avoid filing and improve their relationship with creditors.
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