What Happens to Credit Card Debt in Bankruptcy?

One of the prime motivations for filing a bankruptcy petition is accumulated credit card debt. Many residents of Rockland County who have let their use of credit cards get out of control often look to bankruptcy for relief, but very few understand what happens to credit card debt in a bankruptcy proceeding. The answer to this question depends upon the type of bankruptcy proceeding that is chosen and upon the debtor’s ability to continue to pay off those credit card balances.

Chapter 7 often looks more attractive because it can result in the discharge of all unsecured claims. Because credit card debt is usually unsecured, Chapter 7 appears to be a wonderful cure-all. Unfortunately, not everyone is eligible to file a petition under Chapter 7. To be eligible for Chapter 7, a debtor’s annual income must be lower than the median annual income for New York state over the last six months. Currently, the means test cut off for an individual is $47,414. The limit rises depending upon the number of persons living in the household. If a person qualifies for Chapter 7, the final order discharging the debtor’s obligations will wipe out all unpaid credit card debt.

Under Chapter 13, the fate of credit card debts is a bit harder to predict. A Chapter 13 debtor must prepare and submit to the bankruptcy court a reorganization plan that sets out the debtor’s expected income and the application of that income to repaying current debts. The plan is subject to review by creditors, who can file objections to the proposed repayment schedule. If the debtor makes all payments required by the reorganization plan, remaining debts will be discharged. However, the plan will probably need to provide for at least partial payment of credit card debts to win the court’s initial approval.

Whether Chapter 7 or Chapter 13 provides the better alternative for a person depends upon many factors, some of which are unique to the debtor.