Credit card debt is one of the most dangerous aspects of people’s financial situation. High-interest rates and revolving balances can quickly spiral out of control and become unmanageable. While credit card debt is not the only factor in deciding to file bankruptcy, it often plays a major role.
Therefore, you may be wondering just how bankruptcy deals with credit card balances – is your debt cleared? Do balances need to be repaid?
The short answer is that you can clear credit card debt via a Chapter 7 filing, which addresses nearly all unsecured consumer debt. While this kind of bankruptcy will not free you from paying taxes or student loans, you can get relief from credit card payments, including stopping creditors in their tracks. They can no longer harass you or try to seize your assets.
How It Works
Credit card debt can be insidious, and it affects your financial freedom in multiple ways. Creditors can raise your interest rates, charge late fees, penalize you for being over your account balance, hand you over to debt collectors, deny new credit applications and even file to repossess your belongings.
In most cases, collection agencies have the legal right to call you at home or work and demand payment of your total debt. Filing Chapter 7 bankruptcy can stop their harassment and compel them to cease contacting you. This happens with the filing of the “automatic stay,” which not only stops creditors from calling you but can also stop wage garnishment and any other collection efforts.
Who is Eligible for Chapter 7?
Anyone can choose to file a Chapter 7 bankruptcy case in bankruptcy court, but your success will depend on many factors. If not filed correctly and truthfully, you may lose the right to file in the future for a period of time.
Typically, the average annual income must be below the median income for your state to qualify for Chapter 7 bankruptcy. This is determined through the “Means Test.”
Florida’s median income ranges between $51,000 and $83,000, depending on how many people are in the household. (You can check your eligibility here) As long as your income falls under the posted median income, you pass the means test. Keep in mind; you may be able to subtract certain expenses from monthly income. Read more about the Means Test.
Chapter 13 Bankruptcy and Credit Card Debt
If you earn more income than the designated median amount, you can still consult with a Sarasota bankruptcy attorney to evaluate your options. One of your alternatives may be to file for Chapter 13, which establishes a repayment plan and gives you additional time to pay off debts free of harassment.
A creditor can claim that the courts should not dismiss a portion of your debt. This action within your case is known as an adversary proceeding. Creditors may not want debt dismissed for two main reasons:
Luxury goods were purchased: If you bought “luxury goods or services” within 90 days of filing for Chapter 7, the creditors might object. The cost limit for luxury items and services is $675 within 90 days. The courts have discretion in defining a “necessary” purchase and may not agree with your view of luxury.
Non-dischargeable debts were purchased: A creditor may also ask to deny your filing if you used the credit card to pay for alimony, child support or taxes, which are all items that cannot be discharged in a bankruptcy.
Do you have questions about credit card debt and bankruptcy? Call Richard V. Ellis, a Sarasota-based bankruptcy and family law attorney. Our team is here to help you get the fresh start you deserve.