What Happens to Credit Card Debt in Bankruptcy? Insights for Struggling Consumers
Credit card debt is one of the most common financial burdens facing individuals and families in Los Angeles. For many, balances grow over time due to high interest rates, late fees, or reliance on credit to cover everyday expenses. When minimum payments become impossible and debt collectors start calling, bankruptcy may provide a way forward.
One of the most pressing questions struggling consumers ask is: what happens to credit card debt in bankruptcy? The answer depends on the type of bankruptcy filed. Understanding how unsecured debts are treated in Chapter 7 and Chapter 13 can help you decide whether bankruptcy is the right solution for your financial challenges.
Credit Card Debt as an Unsecured Obligation
Credit card balances are considered unsecured debts, meaning they are not tied to any specific property. Unlike a mortgage, which is secured by your home, or an auto loan, which is secured by your vehicle, credit card companies cannot automatically repossess property if you stop paying. Instead, they must rely on collection efforts, lawsuits, or judgments.
This unsecured status also means that credit card debt is one of the first obligations that bankruptcy can address. For many consumers, consulting a knowledgeable Los Angeles credit card debt attorney can help clarify whether bankruptcy is the right step and which chapter offers the most protection.
How Credit Card Debt Is Treated in Chapter 7
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” is designed to wipe out unsecured debts quickly. For many consumers with overwhelming credit card balances, Chapter 7 offers the chance to eliminate those debts entirely.
When you file for Chapter 7:
- Credit card balances are usually discharged. This means you are no longer legally responsible for repaying them.
- Most unsecured creditors receive nothing. Once the bankruptcy is complete, they cannot continue collection efforts.
- Exemptions protect your property. California law allows you to keep certain assets, such as a portion of home equity, household goods, and retirement savings. In many cases, filers keep all of their belongings.
The process typically lasts just a few months, giving you a relatively fast path to a financial reset. However, not everyone qualifies for Chapter 7. You must pass a means test, which looks at your income compared to California’s median, as well as your expenses.
How Credit Card Debt Is Treated in Chapter 13
Chapter 13 bankruptcy works differently. Rather than discharging debts immediately, it establishes a repayment plan that lasts three to five years. During this time, you make monthly payments to a trustee, who distributes the funds to your creditors.
For credit card debt, Chapter 13 usually means:
- Partial repayment. Depending on your disposable income and the size of your debts, you may only pay back a fraction of your balances.
- Discharge of remaining debt. At the end of your repayment plan, any unpaid portion of your credit card balances is typically discharged.
- Protection of assets. Chapter 13 is often chosen by people who want to keep property that might otherwise be sold in a Chapter 7 case, such as a home with significant equity.
Chapter 13 provides structure and protection from creditors, but it requires consistent income and commitment to a long-term plan.
Which Option Is Right for You?
Choosing between Chapter 7 and Chapter 13 depends on your financial situation, your goals, and your ability to meet eligibility requirements.
- Chapter 7 may be better if your primary concern is overwhelming credit card debt, you have limited income, and you want a faster discharge.
- Chapter 13 may be better if you have a steady income, want to catch up on secured debts like a mortgage or car loan, or need to protect assets that could be at risk in Chapter 7.
In both cases, credit card debt is either eliminated or substantially reduced, offering relief from unmanageable balances and collection pressure.
The Impact of Bankruptcy on Your Credit
While bankruptcy does affect your credit report, the impact of continuing to carry unmanageable credit card debt is often worse. Missed payments, defaults, and lawsuits can all damage your credit score. Bankruptcy, by contrast, provides a clear path to rebuilding once your case is complete. Many people begin improving their credit within a year or two after discharge by making timely payments on new accounts and keeping balances low.
Why Legal Guidance Matters
The rules surrounding bankruptcy are complex, and mistakes can be costly. For example, using credit cards for luxury purchases or cash advances shortly before filing may prevent those debts from being discharged. Additionally, filing under the wrong chapter can put important assets at risk.
An experienced attorney can help you understand your rights, protect your property, and choose the best strategy for your situation. A knowledgeable lawyer can also handle communication with creditors, file the necessary paperwork, and represent you in court, allowing you to focus on moving forward.
Contact Wadhwani & Shanfeld
If credit card debt has become unmanageable, bankruptcy may offer the relief you need. The team at Wadhwani & Shanfeld has helped thousands of clients eliminate or reduce their debts through Chapter 7 and Chapter 13 bankruptcy.
We provide compassionate guidance tailored to each client’s unique situation. Contact us today for a confidential consultation and take the first step toward financial freedom.
Sources:
uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
cacb.uscourts.gov/faqs
