What Will Happen to My Credit Card Debt if I File Chapter 7 Bankruptcy?

Credit CardsDuring the past few years, many Georgian families have consulted with bankruptcy attorneys to discuss whether filing for bankruptcy is the best option available to them for alleviating their financial burdens and improving their household finances.  At our office, one of the most frequently asked questions about the bankruptcy process is what happens to credit card debt if a person decides to file bankruptcy?  Read on to learn more about how the bankruptcy court treats credit card debt and how the bankruptcy process may help you and your family get back on sound financial footing.

What is Chapter 7 Bankruptcy?

Before we begin discussing credit card debt, it is important to point out that there are two types of bankruptcies that families or individuals can file – Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, the person who files the bankruptcy (called “the debtor”) uses the bankruptcy system to discharge or “wipe away” most if not all of the debtor’s qualifying debts.

How Does Chapter 7 Treat Credit Card Debt?

In general, filing a Chapter 7 bankruptcy is a great option for Georgians who have large amounts of consumer-based credit card debt.  When a debtor files a Chapter 7 bankruptcy petition, the debtor must list all of his/her creditors, which includes credit card companies.  The Chapter 7 case will be assigned to a bankruptcy trustee who will help the court administer the case.  The trustee will examine the Chapter 7 petition to determine whether the debtor has any assets that may be sold in order to pay back as many creditors as possible.

In the majority of Chapter 7 cases, there are no assets for the trustee to sell.  However, even if there are, credit card companies are considered unsecured creditors and their claims are classified as non-priority claims.  Because any secured creditors (such as a car dealership) who have claims against the bankruptcy estate get paid first, it is pretty rare for a credit card company to collect any payments during a Chapter 7 case.

At the conclusion of the Chapter 7 case, any existing debt (including credit card debt) is discharged which means the debtor is no longer responsible for paying it back.  It is this Chapter 7 discharge that makes filing this type of bankruptcy case so attractive and beneficial to many Georgian families.

The Exceptions to the Chapter 7 Discharge

Clearly Chapter 7 holds tremendous promise for debtors who are carrying large amounts of credit card debt and are struggling to keep their heads above water.  However, it is very important to emphasize that there are exceptions to the Chapter 7 discharge that could prevent a debtor from enjoying the benefits of wiping away his/her credit card debt.

The exceptions to the Chapter 7 discharge include those charges that were incurred through false pretenses or false misrepresentations.  These exceptions are pretty common sense because it would not be fair for a debtor to receive a discharge of debts that he/she incurred fraudulently – that would be taking advantage of the bankruptcy system.  The two most frequent exceptions are very recent debts incurred for luxury goods and cash advances.

If the debtor used a credit card to purchase more than $650 of luxury goods (such as a fancy vacation or expensive piece of jewelry) during the 90-day period before he/she files for bankruptcy, these specific credit card purchases are assumed to be non-dischargeable.

Additionally, if the debtor takes out more than $925 in cash advances during the 70-day period before filing for bankruptcy, this debt is also assumed to be non-dischargeable.

Now, these two exceptions are not set in stone and it is possible to prove to the bankruptcy court that luxury good purchases and cash advances should still be included in the Chapter 7 discharge.  However, it can be very difficult to do so, which is another reason why working with an experienced Georgia bankruptcy attorney is highly recommended.

To learn more about whether Chapter 7 is a good option for discharging your credit card debt, contact our office today to speak to an attorney about your case.  We look forward to speaking with you!