For many people facing financial difficulties, credit card debt is one of the most overwhelming burdens. High interest rates and minimum payments make it nearly impossible to pay off balances, especially if you’re struggling with other financial challenges like medical bills, job loss, or unexpected expenses. Fortunately, bankruptcy can provide relief by addressing credit card debt in specific ways.
If you're considering bankruptcy in Chattanooga, understanding how it affects credit card debt is crucial to determining whether this solution is right for you.
Chapter 7 Bankruptcy and Credit Card Debt
Chapter 7 bankruptcy, also known as "liquidation bankruptcy," is the most common type of bankruptcy for individuals with overwhelming unsecured debt, such as credit card balances. Under Chapter 7, most or all of your unsecured debts—including credit card debt—are typically discharged, meaning you are no longer legally required to repay them. However, this process involves several important steps.
How It Works:
- Filing for Bankruptcy: When you file for Chapter 7 bankruptcy, an automatic stay goes into effect. This immediately stops creditors from attempting to collect any outstanding debts, including credit card debt.
- Means Test: To qualify for Chapter 7, you must pass a means test, which evaluates your income and expenses to determine if your financial situation qualifies for liquidation bankruptcy. If your income is below a certain threshold, you’re likely eligible.
- Liquidation: In Chapter 7, a bankruptcy trustee may sell non-exempt assets to pay off your creditors. However, most people filing for Chapter 7 are able to keep essential property, such as their home and car, due to Tennessee’s exemption laws.
- Discharge: Once the liquidation process is complete, your remaining credit card debt will be discharged, meaning you are no longer responsible for repaying it.
One thing to keep in mind: If you’ve recently run up significant credit card charges before filing for bankruptcy, the court may view this as fraudulent. In such cases, those specific charges may not be discharged.
Chapter 13 Bankruptcy and Credit Card Debt
Chapter 13 bankruptcy, known as "reorganization bankruptcy," works differently from Chapter 7. Rather than liquidating assets, Chapter 13 allows individuals to reorganize their debts into a manageable repayment plan. Credit card debt is included in this plan, but instead of being discharged immediately, you make payments toward it over a 3- to 5-year period.
How It Works:
- Repayment Plan: When you file for Chapter 13 bankruptcy, you’ll propose a repayment plan to pay back your debts, including credit card debt. The amount you pay is based on your income, expenses, and the total amount of debt you owe.
- Priority of Debts: In a Chapter 13 repayment plan, credit card debt is considered non-priority unsecured debt, meaning it’s paid after higher-priority debts, such as taxes and child support.
- Remaining Balance Discharged: Once your repayment plan is complete, any remaining balance on your credit card debt is discharged, freeing you from further financial obligation.
Chapter 13 can be a better option if you want to protect your assets, like a home or car, from liquidation while still addressing your credit card debt.
Credit Card Debt That May Not Be Discharged
While bankruptcy can eliminate most types of credit card debt, there are exceptions. Any credit card charges for luxury goods or services made within 90 days before filing, or cash advances taken within 70 days, may not be discharged if the court determines you had no intention of repaying them.
Additionally, fraudulent activity or attempts to hide credit card debt can lead to penalties, and in some cases, debts incurred through fraud may not be wiped out in bankruptcy.
Filing for bankruptcy can offer significant relief from credit card debt, whether through liquidation under Chapter 7 or a repayment plan under Chapter 13. By understanding how bankruptcy handles credit card debt, you can make informed decisions about your financial future. Consulting with an experienced Chattanooga bankruptcy lawyer is the best way to ensure that you navigate the process effectively and achieve a fresh financial start.
Contact Tom Bible Law Today!
Struggling with overwhelming credit card debt? Our experienced Chattanooga bankruptcy attorneys can help you explore your options and determine the best path forward. Contact us today for a free consultation and take the first step toward financial freedom.