Should You File for Credit Card Bankruptcy

by Jason on July 22, 2010

Filing for bankrupcty can sometimesbe the best bet for someone with unpayable credit card balances.

A credit card bankruptcy can lower monthly expenses, stop interest from accruing, and give you time to restructure your debt without fear of legal repercussions. The credit card bankruptcy process can give financial relief, but does come at the expense of your credit and your assets.

When you file for bankruptcy your credit will be affected for a span of 7 to 10 years. This might make it more difficult to borrow money, rent a home, or even get a job.

You may lose certain assets to your creditors, but if you are facing credit card debt that is no longer manageable, it still might be the best move.

A few years ago it was much easier to eliminate credit card debt through a chapter 7 bankruptcy. But in 2005, the Bankruptcy Abuse Prevention Act was passed and made it more difficult to charge off credit card debt and other unsecured debts.

Chapter 7 can be a good option for someone with minimal assets to protect from a liquidation (i.e. home, car). It can give debtors a fresh start, but will still leave a big ding on their credit reports. After a chapter 7 filing, a debtor’s assets are liquidated by a judge and the proceeds are divided among the creditors.

Side Note from Jason: If you’re a Christian and struggling with the idea of bankruptcy, you should check out this post on Christian Bankruptcy.

After the assets are sold and the proceeds doled out, a debtor would be completely debt free. But since the 2005 law, any monthly income that exceeds $100/mo. will disqualify a debtor from filing Chapter 7.

The courts will conduct a “means test” to determine what your expendable monthly income is. If you have over $100 or more in extra income per month, you would not be able to completely discharge your debts through chapter 7 and would only be able to set up a repayment program through chapter 13.

Can a credit card company stop my bankruptcy?

When a bankruptcy goes to court, a credit card company may try and stop the discharge of debt by filing an “adversary proceeding”. Usually this is due to instances of fraud.

The company might claim that a debtor applied for a card with false info or that they made charges without any intent of repayment.

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If a person made a large amount of charges after they sought help from a Bankruptcy Attorney, or there was an indication that the they made charges with the intent to dismiss them in court, your judge might consider the creditors side.

But, once the bankruptcy is finalized, you may not be sued over these debts.

Can Chapter 13 bankruptcy help with credit card debt?

With chapter 13 bankruptcy (AKA: wage earner’s bankruptcy) you are allowed to keep certain assets (house, car, etc.), while making a reduced payment to your creditors.

This type of proceeding allows people with an income (of $100/mo or more), to create a repayment plan over a typical period of 3-5 years.

A Chapter 13 filing can stop foreclosure for a period of time and can allow the debtor to catch up on delinquent mortgage payments.

Another important thing about chapter 13, with regard to credit card debt, is that interest will stop accruing. The interest on your credit card balances will come to a halt and you can begin to repay the outstanding debt.

This means that there are no more balance increases after you file for bankruptcy. Sometimes dealing with this debt through bankruptcy can be easier than with non-consumer friendly terms on many of these cards.

Once you have a repayment plan in place, a trustee is appointed by the courts to make payments to these creditors on your behalf. All of the creditors are paid by the trustee out of one single monthly payment made by the debtor.

If you want to check out some great legal resources, make sure you look into legal zoom reviews and see what they can offer when bankruptcy is looming over your head.

Is bankruptcy expensive?

The court filing of the chapter 7 and chapter 13 paperwork costs around $300, but this does not include the price of a lawyer.

Internet consensus puts the entire package of a bankruptcy (legal help included) at at around $1000-$3000, but the price will vary depending on your lawyer and type bankruptcy you are filing.

You may be able to get a slight break, if you can negotiate installments to pay your legal fees. But if you are able to get rid of alot of debt, that bankruptcy can pay for itself.

Counseling before bankruptcy

The 2005 Bankruptcy laws also state that any individual seeking bankruptcy, must receive mandatory credit counseling. This applies to both chapter 7 and chapter 13.

This counseling must be sought through a government approved company within the 6 month period before the filing. The debtor must also complete debt education classes in order to have their debts dismissed.

Usually these courses can be very beneficial and help debtors understand the ins and outs of the bankruptcy process before they file.

This is important because these are complex financial actions and can seriously affect the filees future. The more knowledge you can gain about this process, the more prepared you will be.

This is a guest post by Garrett Driscoll from Debt Eagle. Visit his site if you are having credit card debt problems, need advice on settling, or are considering bankruptcy.

Note from Jason: Bankruptcy has grown in popularity in recent times.  In my opinion, you should never rush into bankruptcy and it should almost always be a last resort after careful and prayerful consideration.  A heartcheck regarding your motivations for bankruptcy is wise also.  Everyone’s situation is different, so make sure you take a full inventory of your options before a bankruptcy is considered.  Check out this Credit Card Payoff Calculator to give you an idea of how long it will take to pay off your debt.

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