Figuring Out the Best Bankruptcy for Credit Card Debt
In many conversations I’ve had with people wanting to know more about filing chapter 7 or chapter 13, it really requires taking a step back, figuring out what’s going on, and thinking about how bankruptcy works. One type of bankruptcy may be the best fit in one situation, but not the best fit in another situation. If you’ve been working and you fall behind on credit card payments, which may be different if you have a house and missed payments on your credit card, you may think that you likely don’t qualify to file. The reality is that there are a number of factors that need to be considered in that decision. In this article, we’ll explore some of those factors to help you figure out the best bankruptcy for credit card debt.
The Growing Problem of Credit Card Debt
The alarming rise of credit card debt has set new records. The U.S. Government Accountability Office reported that as of summer 2023, credit card debt in the United States reached a milestone, topping $1 billion. While most of the pandemic relief programs are long gone, peoples’ incomes have not kept pace with rising costs, including the cost of debt.
It’s no secret that society today is driven by consumerism, and the convenience of credit cards and other credit-based programs has made it easier for individuals to make purchases without immediate consequences (or even the need to swipe a card). This can, however, lead to a habit of spending beyond one’s means. The accumulation of debt happens gradually, often starting innocently with small items which quickly accumulate, leading to an overwhelming amount of debt. Tie that in with spending habits that were supported by pandemic-related relief that no longer exists, making it harder for individuals to pay off their liabilities. The repercussions are far-reaching, stretching beyond individual’s financial health to also affect their mental and emotional state, since constant worry over debt can result in stress, anxiety, and depression. This spending behavior often becomes cyclical, and by the time the person realizes the hole they’ve dug, they can’t see a way out.
Why Do People Consider Filing Bankruptcy for Credit Card Debt?
Struggling with credit card debt Is often one of the most stress-inducing episodes in a person’s life. The incessant letters and phone calls can cause conflict and shame. The threat of being sued for a credit card debt is considered by many to mean failure in life. According to a survey by Forbes Advisor, 54% of U.S. adults with debt say they always or often feel stressed because of their debt. In this same survey, 48% of respondents reported sleep problems, 40% had higher anxiety, 38% led diminished social lives and 34% experienced depression
For many people, the question that keeps them up at night is “how do I get out of debt?” because the stress caused by debt can be unbearable. Once they start asking this question, they often find themselves going down the rabbit-hole of all the ways to eliminate credit card debt: debt consolidation, repayment plan, snowball budget, bankruptcy. Of these alternatives, bankruptcy is usually seen as the last option because of perceived stigma, since many people worry that filing bankruptcy means they lose all their property and can never have credit again. Bankruptcy, however, offers a fresh start, potentially enabling the debtor to discharge credit card debt insofar as it qualifies as unsecured debt. Choosing bankruptcy as a debt settlement strategy may be a prudent choice, especially when considering that filing for bankruptcy often proves to be the fastest, most complete, and most affordable way to wipe out your debt.
How to Navigate Debt Collection and Lawsuits while Considering Bankruptcy
Navigating debt collection and lawsuits while contemplating bankruptcy can be an intimidating journey. When served with lawsuit documents, one of the first things visible on the front of the court documents is that you have a limited amount of time to respond to the lawsuit before a default is entered. This can heighten any stress that you were feeling before.
One thing you may want to consider is to contact the creditor or their lawyer to ask questions about the account. These questions may include verification of the filing to make sure it isn’t a scam, questions about the current debt amount, as well as copies of documents referenced. Many times, the debt collection office or creditor attorney will request some kind of payment, or that you agree to waive certain defenses. You do not want to agree to anything while you are considering bankruptcy!
The most prudent thing you can do is seek legal advice from an experienced bankruptcy attorney who can help you understand your financial position and legal options. They would guide you through processes, including the timing and process of the lawsuit, as well as how the ‘Automatic Stay,’ which can halt most collections the moment you file for bankruptcy, provides relief from the legal action initiated by creditors. Moreover, distinguishing between dischargeable and non-dischargeable debts, like student loans or child support, can help in deciding if bankruptcy is the most suitable option for you. Designing an effective plan for managing your assets and liabilities during bankruptcy will also play a crucial role in finally liberating you from the shackles of debts.
Bankruptcy and Its Influence on Debt Collection
If you receive a debt collection notice or lawsuit documents, contacting the creditor and telling that them you are considering filing bankruptcy will not stop the enforcement actions they are taking. Only the actual filing of a bankruptcy case will generally stay actual collection and enforcement activity.
Notwithstanding, if you speak with a creditor and advise them that you are considering filing for bankruptcy, they may be more inclined to discuss a settlement with more favorable terms for you. The reason why discussing bankruptcy with a debt collector may provide leverage to you is that when a debtor files for bankruptcy, an automatic stay is issued which immediately stops collection activities by creditors. This means creditors can’t pursue lawsuits, wage garnishments, or even phone calls demanding payment. Moreover, if a discharge is ultimately entered in the bankruptcy case, unsecured debts like credit cards and medical bills can be completely discharged. This means that the creditor will be forever prohibited from trying to enforce or collect on its claim against the debtor. If a creditor holds a claim to a dischargeable debt, they may be influenced to offer a better deal to you before you file a case.
Selecting Bankruptcy as a Debt Settlement Strategy
Selecting bankruptcy as a debt settlement strategy is something to be considered as early in the process as possible. Every alternative to deal with credit card debt comes with its own benefits and drawbacks.
If you are considering debt consolidation versus bankruptcy, generally that means applying with banks for a loan to payoff credit cards and consolidate your debt. This means shopping around for lenders who are willing to lend you money, often at relatively high interest rates.
If you are considering a debt repayment plan as an alternative, these outfits usually charge a fee on top of what you owe your credit cards so that they correspond and interface with the credit card bank. Clients have also reported to me that when they enter a debt repayment plan with some of the companies they see on TV or hear on the radio, their fee is taken right off the top from plan payments, resulting in creditors not even receiving minimum payments.
Budgeting is another bankruptcy alternative that many people consider. The challenge that some people have with budgeting is that they don’t feel that they are disciplined enough to stick to a financial budget. Other people have irregular income, so trying to create and follow a budget is too challenging.
How Bankruptcy can Erase Credit Card Debt
Filing for bankruptcy can effectively erase credit card debt, providing relief if you fall behind on your credit card balances and don’t anticipate any substantial changes in your ability to pay it back. While bankruptcy law provides lots of different tools to debtors seeking a financial fresh start when they are unable to repay their debts, two of the most powerful benefits the bankruptcy court can provide are the automatic stay and the discharge order.
As soon as a bankruptcy case is filed, generally an order of relief is entered and goes into effect. This order of relief, known as the automatic stay, is found in the federal bankruptcy law, prohibits most creditors from taking any action to collect or enforce a debt against the debtor. This means that the creditor must stop sending letters, stop making phone calls, stop any lawsuit, stop a wage garnishment, stop a foreclosure sale, and more.
If and when the debtor obtains the order of discharge, it permanently prohibits a creditor from taking any action to collect or otherwise enforce their claim. Thus, while the automatic stay goes into effect at the beginning of the case and stops a creditor from trying to collect a debt during the bankruptcy process, the discharge order converts this into a permanent stay and, as a result, the creditor can no longer try and collect on its claim. This is how bankruptcy effectively erases credit card debt.
The Role of Unsecured Debt in Bankruptcy
Knowing whether a debt is a secured debt versus unsecured debt is really important in bankruptcy. Unsecured debt plays a crucial role in bankruptcy proceedings as it represents debts that are not tied to an asset, like credit card debt, personal loans, or medical bills. Bankruptcy law, however, does not change or alter the rights of a secured creditor. When a person files for bankruptcy, unsecured claims are the debts people are seeking to discharge, since a secured creditors rights to collect or enforce in the collateral are generally unaffected in bankruptcy. In other words, the debtor may not have to repay some or all of these unsecured debts, but cannot interfere with the rights of secured creditors where assets may be repossessed by the creditors.
It’s also important to keep in mind that not all unsecured debt is dischargeable. Debts such as taxes, student loans, or child support, are generally exempt from discharge during the bankruptcy process. The amount of unsecured debt a debtor has can also influence which type of bankruptcy they file for, as there are debt limits in a chapter 13 case. Nevertheless, unsecured debt discharged by a bankruptcy court offers a fresh financial start to debtors, helping reshape their economic future.
When is the Right Time to Declare Bankruptcy?
Declaring bankruptcy is a major decision that can have lasting implications. It should not be taken lightly or seen as an easy way out from financial obligations. Sometimes, however, it is the best option for someone mired in critical financial predicaments. The right time to declare bankruptcy is as early in the process as possible. This is because, with all the stress that the burden of debt can cause on a person and their well-being, it would be wise to get out from under the debt as quickly as possible.
Another reason why the right time to file bankruptcy is as early in the process as possible is because sometimes waiting too late can create extra work or hurdles, which may result in additional costs. For instance, if a person files a bankruptcy before a judgment is entered against them in a lawsuit, then presuming a discharge is eventually entered, the creditor will be unable to obtain a judgment against the debtor. If, on the other hand, a person waits on filing a bankruptcy case until after a judgment is entered against them, while the discharge order may prevent the creditor from collecting or enforcing the debt against the person in the future, nothing forces the creditor from removing or otherwise vacating the judgment that was entered. As a result, when this debtor later tries to finance a car or apply for a mortgage, this judgment will continue to appear and may cause issues with credit after the bankruptcy.
Understanding the Difference between Chapter 7 and Chapter 13 Bankruptcy
When considering filing bankruptcy for credit card debt, two chapters generally come to mind – Chapter 7 and Chapter 13. The chapters just refer to where in the Bankruptcy Code the source of law is found (chapter 7 bankruptcy finds its source of law in 11 USC Section 701, et seq., while chapter 13 bankruptcy finds its source of law in 11 USC Section 1301, et seq. Understanding the difference between Chapter 7 and Chapter 13 bankruptcy is crucial to make an informed decision on tackling significant debt issues.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a “liquidation bankruptcy.” In this type of bankruptcy, all of the debtor’s non-exempt assets are gathered and sold by a trustee appointed by the court. The proceeds, if any, are then distributed to unsecured creditors. The debtor is allowed to keep any exempt property. After the case is administered, an order of discharge is entered and the case is closed. If a chapter 7 case doesn’t have any extraneous issue, it is over and done in about 4 months, from date of filing of the voluntary petition to the date the judge signs and enters the discharge order. It’s important to note that filing for Chapter 7 Bankruptcy results in a public record and it remains on the debtor’s credit report for up to ten years from the filing date, and the debtor cannot obtain another discharge under chapter 7 for eight years.
What is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is a form of bankruptcy enabling individuals with steady income to develop a plan to repay all or part of their outstanding debts. It proposes a three or five-year repayment plan to creditors, wherein the debtor’s future income is used to make payments. During this period, creditors cannot initiate or continue any collection efforts, providing the debtor a window to repay without unnecessary pressure. Essentially, Chapter 13 Bankruptcy allows debtors to make up for missed payments. It also provides a unique advantage of cutting off interest from continuing to accrue (which is one of the biggest challenges many people face when trying to get out of debt – payments they make to their credit card bill almost all go to interest).
Chapter 13 is only available to individuals – businesses cannot file chapter 13. Additionally, as mentioned above, there are debt limits to chapter 13 cases. Filing chapter 13 also results in a public record and remains on credit reports for up to ten years. A debtor cannot obtain another discharge under chapter 13 for six years.
The Role of the Bankruptcy Court in Debt Collection
The Bankruptcy Court plays a crucial role in debt collection, primarily by providing a forum for individuals and businesses struggling with debt to manage their creditors. Its fundamental responsibility involves examining the debtor’s financial condition, assessing the validity and amount of creditors’ claims, and ensuring that the rights of all parties are enforced. If there are any disputes, such as an alleged violation of the automatic stay, the bankruptcy court would adjudicate the issue.
Thus, the Bankruptcy Court plays a pivotal role in debt collection, offering an orderly and impartial approach to debt collection.
How to Decide between Chapter 7 or Chapter 13 Bankruptcy
There are many factors to be considered when deciding between filing for Chapter 7 or Chapter 13 bankruptcy. Both methods offer debt relief, but they work in different ways and come with their own sets of pros and cons.
As discussed above, chapter 7 is a “liquidation bankruptcy,” involves selling off any non-exempt property to pay unsecured creditors. This will often be a better option for those with lower income and little to no assets. Additionally, a chapter 7 case is relatively fast, taking just about 4 months from the time of filing until the time the discharge order is entered. One major consideration is that there is no right to voluntarily dismiss a chapter 7 case, so if you file it accidentally, you may have opened up a can of worms that cannot be closed. The best and most powerful aspect of a chapter 7 case is that, if you qualify and all of your assets are exempt, your debt is discharged in its entirety without having to make any payments to any creditors.
A Chapter 13, on the other hand, is a “repayment bankruptcy,” and involves creating a payment plan to pay back debts over 3 or 5 years. Chapter 13 cases are really flexible, and allows individuals to keep their assets. If someone contacts me asking about bankruptcy, and they own real estate, I will generally lean towards chapter 13 so that risk of losing the house as a non-exempt asset is mitigated. Consideration is usually based on income, assets, debt type and the debtor’s long-term financial goals. Chapter 13 cases are disfavored because, at a minimum, you are paying creditors back at least some percentage of the debt. Another drawback of a chapter 13 case is that it is long. Being subject to court oversight for 3 or 5 years isn’t easy, there are many ways that can cause a chapter 13 case to default, and if you ever want to do anything with money (like buy a car or buy furniture), you will most likely have to file motions in court to get approval of such requests.
Unfortunately, there is no one factor that controls whether you should file chapter 7 or chapter 13. Generally, if you qualify for a chapter 7 case and all your assets are exempt, it’s probably better to file chapter 7. If, however, you are considering bankruptcy because you are facing foreclosure, then I would lean towards chapter 13. As it concerns credit cards, chapter 7 is preferred since unsecured creditors (like credit cards) have to be paid back at least something in a chapter 13 case.
How Does Filing Bankruptcy Affect Credit Card Payments and Balances?
As noted above, filing bankruptcy has a significant and immediate impact on credit card payments and balances. Recall that once a bankruptcy case is filed, the automatic stay goes into effect. This prohibits creditors from attempting to collect or enforce a debt. This usually results in credit card companies suspending the account immediately. The reason is that if a credit card bank proceeds with a scheduled payment from the debtor’s bank account, it may be considered a violation of the automatic stay, and the creditor may be subject to penalties and sanctions. To avoid this, the credit card bank will generally mark the account as in bankruptcy, suspend all payments, and report any open balances as in bankruptcy to the credit bureaus.
Will Bankruptcy Erase All Credit Card Balances?
As discussed above, remember that a discharge of debt is what you get at the end of your case, regardless of whether you file for chapter 13 bankruptcy or chapter 7. In theory, any credit card balances (or other claims) aren’t necessarily erased, but rather creditors cannot attempt to collect or enforce the debt. The discharge is presumed to apply to all debts (including credit card balances) unless the claim is exempt from discharge, or there is a court order excepting the claim from discharge.
An example may help explain. Let’s say you file bankruptcy, and one claim is from your dentist, who performed work on you and told you that you can pay the balance of $500 over time. The discharge order applies to this debt just like it does to your other debts. The dentist, upset that you still owe their office $500, doesn’t have to erase the debt. They just cannot take any action to attempt to collect or enforce the debt. The dentist can refuse to perform future services for you. As you can see from this example, the debt isn’t erased, but rather the creditor is handcuffed from trying to collect the claim.
For credit card balances, many banks will often treat claims discharged in bankruptcy as a bad debt in their books. If a creditor does apply the claim as a loss, then they cannot try and collect that debt in the future, and that debt is in fact erased. Many credit card lenders will follow this course of practice because they want your business, and want you to use a credit card from them on the other side of the bankruptcy.
What are the Long-Term Consequences of Filing Bankruptcy on Credit Cards?
The long-term consequences of filing bankruptcy on credit cards tends to be overrated in mainstream media. One common misconception of filing bankruptcy for credit cards is that you damage your credit forever, but as we discussed above, this is inaccurate. Many credit card companies will send debtors offers for new credit cards even before the case is over. The reason is that they make money on interest you pay. when you use credit As a result, the credit card banks want you to use your credit cards.
Another common misconception about filing bankruptcy on credit cards is that a bad marking remains on your credit report for seven years, or something like that. As discussed above, credit bureaus will note the bankruptcy filing on your credit report for up to ten years. This does not preclude you, however, from obtaining credit, or even securing car loan or a mortgage. Mortgage brokers and mortgage loan officers have shared that many loan products are unavailable to individuals that have filed for bankruptcy for 2 years after their case, but after the 2 year waiting period, the bankruptcy filing isn’t even considered. (There is an FHA loan product where this waiting period is just 1 year!)
The Impact of Bankruptcy on Your Credit Score
Credit is one of the most frequent topics raised by people considering bankruptcy. Declaring bankruptcy, however, may not have the significant negative impact on your credit score that most people assume. The precise impact varies depending on the specifics of your situation, but if you’re considering bankruptcy, be aware that it can generally cause your credit score to drop initially. A bankruptcy filing is public record, and is noted in your credit report for up to ten years.
Notwithstanding, many debtors I’ve worked with have defaulted on one or more credit cards or other accounts, which has triggered them thinking about filing bankruptcy. Additionally, many of these debtors reported that, while there credit score may have dropped a bit immediately after the filing of the bankruptcy case, they also often noted an increase in their credit score even before the case was over.
The Impact of Bankruptcy on Your Credit Reports
As discussed above, bankruptcy does stay on your credit report for up to 10 years. The case is also public record. As a result, whenever a lender or some other person requests a copy of your credit report, there will be a bankruptcy case to address.
Notwithstanding, in some contexts, it may not be too critical. If you are looking to apply for a mortgage, keep in mind that many lenders do not count the bankruptcy in underwriting if more than 2 years have passed. There are car loan lenders that lend specifically to people who have filed for bankruptcy.
With respect to the credit card balances on your credit reports, if they were discharged in a bankruptcy, there should be some notation of bankruptcy on the account line.
Life after Bankruptcy: A Financial Fresh Start
Anyone that files for bankruptcy will have to take and complete 2 courses. The first course, to be completed before the case is filed, is known as credit counseling. The second course, to be completed after the case is filed, is known as debtor education. These courses offer education around budgeting, financing and debt management. Imagining life after bankruptcy can seem daunting and overwhelming to most people.
The process, however, is not a financial death sentence as it is often misconstrued. It is, rather, a chance for new beginnings; an opportunity to review, re-assess, and rebuild one’s economic foundation. Efforts could range from making timely bill payments to avoiding the accumulation of debt, and trying to use a budget. While it may initially be challenging, and credit opportunities may be scarce and expensive, with a conscientious approach, your credit score can progressively heal. With perseverance, discipline and a well-executed plan, life after bankruptcy can represent an exciting journey towards financial independence and stability.
Working with an Experienced Bankruptcy Lawyer to File Chapter 7 Bankruptcy or Chapter 13
Experiencing financial difficulties can be incredibly stressful, especially when the burden of debt collection issues is causing health issues. In such situations, speaking with a bankruptcy attorney, like the Law Office of Richard Kistnen, can be a great conversation. Bankruptcy lawyers have a deep understanding of the bankruptcy laws and debt collection intertwine, with many questions answered in a quick 5 or 10 minute conversation.
Credit card companies can be incessant when it comes to collecting their claims. Letters and phone calls are non-stop. Eventually, they will seek to sue you, obtain a judgment, and then try to enforce that judgment with things like a wage garnishment or bank levy. By filing for bankruptcy, you may be able to stop debt collection calls, discharge your debts, and possibly protect most (if not all) of your property. All of this helps to provide peace of mind to you.
Don’t let the burden of credit card debt continue to weigh you down and stress you out. Figuring out the best bankruptcy for your credit card is as simple as a quick conversation with the Law Office of Richard Kistnen, which you can call at (718) 738-2324, or clicking this link to book your confidential, no-obligation bankruptcy consultation right now.