Credit Card Debt Under Bankruptcy Law
Credit card debts, with some exceptions, are treated as unsecured claims when you file for bankruptcy. Occasionally, a credit card will be secured with collateral, but in most cases, debts accrued on a credit card are not secured, and they will be discharged through Chapter 7 or Chapter 13 bankruptcy.
In a Chapter 7 case, the trustee decides how many of your unsecured creditors will be paid back if you have the assets to pay off not only secured claims but also unsecured claims. The trustee’s job is to make sure that creditors get paid back to the extent possible and to liquidate your nonexempt assets, to the extent that there are any assets, so that this can happen. Most Chapter 7 bankruptcies do not include any assets, and there is no property that can be liquidated in order to pay off creditors.
Any funds from liquidated assets are paid to creditors based on their priority. Unsecured creditors, such as credit card companies, are last in priority. Most unsecured creditors do not receive any payment at all, but if there are funds sufficient to pay unsecured creditors, these are distributed pro rata. This means each unsecured creditor receives the same percentage of its claim, which is usually very little.
If you file Chapter 13 bankruptcy, your repayment plan will only be confirmed if it repays most or all of your creditors over a three to five year period. However, not all creditors will be repaid in full or at all. Creditors are repaid according to their priority in Chapter 13. Your plan must address repayment of all secured creditors if you want to keep the property securing the debts, as well as priority unsecured debts like taxes and child support.
As noted above, credit cards have the lowest priority as long as the debts are unsecured. How much the credit card company does get paid back depends on several factors, including your exemptions. If you can pay more than secured and priority debts, you will need to pay back the credit card companies to the extent you are able.
Exceptions to Credit Card Debt Discharge
Credit card debts incurred because of fraud, misrepresentation, or false pretenses are presumptively not dischargeable. For example, if you buy more than $725 worth of luxury goods or services within 90 days of filing for bankruptcy and charge the luxury goods or services to your credit card, the debt is presumptively non-dischargeable. Any goods that are more than what is necessary to support you or your dependents are considered luxury goods or services. Similarly, if you use a credit card to get cash advances of over $1,000 within the 70 days preceding your bankruptcy filing, the debt is presumptively non-dischargeable regardless of what you use the cash advance for. These numbers change periodically. Although these two examples are presumptively the result of false misrepresentation, fraud, or false pretense, you can try to prove that you intended to repay the charges and believed you could.
Can Credit Card Companies Challenge Dischargeability?
Credit card companies that want to challenge your bankruptcy discharge need to file complaints with the bankruptcy court where you filed for bankruptcy. If creditors do not file complaints, your credit card debt will be discharged even when it falls within the exceptions for luxury goods and services and cash advances.
Credit card companies can file a complaint within 60 days of the first meeting of creditors. In response, you will need to file an answer within the specified deadline and dispute the creditor’s complaint. In some cases, the court will hold a hearing to decide whether your debt is dischargeable.
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