Credit Card Debt in Chapter 7 Bankruptcy

By Cara O'Neill, Attorney
All or most of your credit card debt will likely be discharged in Chapter 7 bankruptcy unless property secures your account, or you've engaged in fraudulent activity.

Credit cards are a staple in today’s world. When times are good, you’re able to pay the balance regularly and benefit from perks like vacation points. But when the lean times come—such as after a job loss—you might start using them for necessities, and as the balance adds up, it might become more difficult to make the hefty monthly payments.

That’s when Chapter 7 bankruptcy offers a simple solution. If you qualify, it quickly wipes out your burdensome credit card debt and gives you the breathing room you need to get back on your feet.

Is it a Secured or Unsecured Credit Account?

There are two different types of credit card accounts and filing for bankruptcy affects each differently.

  • Unsecured credit accounts. Most major credit cards and department store charge cards are unsecured. You sign a “promise to pay” agreement to pay back the amount you charge on the card, plus interest, but nothing more. You don’t pledge property (such as your car) that the creditor could take if you failed to make your monthly payment.
  • Secured credit accounts. Furniture, jewelry, electronics, and appliance credit accounts are often secured debts. The store can pick up your television, bed, refrigerator—even the ring on your fiancé’s finger—if you don’t pay your bill. This type of agreement is known as a purchase money security agreement.

You can find out which type of credit card you have by reviewing the contract terms or reading the back of your receipt.

Unsecured Credit Card Debt in Chapter 7

Here’s the good news. The balance on the majority of the cards in your wallet will get wiped out in Chapter 7 bankruptcy. That's because most of your accounts are likely unsecured. If you file for Chapter 7, the creditor can’t take back the school supplies you bought in August to satisfy your obligation.

You’ll list your unsecured charge accounts on Schedule E/F: Creditors Who Have Unsecured Claims.

Problems to Avoid

An unsecured credit card balance is often easy to get rid of, but things can still go wrong. Find out about situations that might throw a wrench in your plans.

Inappropriate Credit Use

A creditor can oppose the discharge of a debt by filing a bankruptcy lawsuit called an adversary proceeding. Here are some important points.

  • Although you can use your credit card for necessary purchases, such as food, modest clothing, and utilities, luxury purchases made within 90 days of filing for bankruptcy are presumed fraudulent (as well as cash advances taken 70 days before filing).
  • Your creditor might allege that you committed fraud if you were untruthful on your credit card application.
  • You might run into a problem if you transfer the balances of nondischargeable debt, such as student loans or income taxes, onto your credit card.
  • If you have a gambling problem, and you took out cash advances on your credit card, your state might have a law that prevents you from discharging the advances.
  • Well into the proceedings, the bankruptcy court could allow the state case to continue to judgment; or, you might find yourself litigating the same issues in the bankruptcy court.

Creditor Lawsuits in State Court

If your creditor files a lawsuit against you, it’s usually best to file for bankruptcy before a creditor gets a money judgment. Here’s why.

  • A creditor can use a money judgment to turn unsecured debt into a secured debt by filing an involuntary lien against your property (liens don’t usually go away in bankruptcy).
  • If the complaint alleges fraud (perhaps by claiming that you stole your elderly father’s identity), and the judgment comes before filing for bankruptcy, in most cases, you won’t be able to discharge the debt.
  • A money judgment allows the creditor to take aggressive collection steps, such as forcing your employer to deduct money from your paycheck (wage garnishment) or instructing the bank to withdraw money from your account (bank levy).

The solution? While it’s not absolute, you’ll have a better chance of avoiding such problems if you file for bankruptcy soon after you receive the complaint. If your bankruptcy filing occurs before the court enters the judgment against you, you’ll stand a better chance of wiping out the credit card balance.

Keep in mind that you have limited time to respond (usually 30 days or less). If you get served with a lawsuit, and you haven’t already spoken to a bankruptcy attorney, it would be a good time to do so. The attorney will review the court papers and help determine whether you should file before the court enters a judgment, as well as explain how much it will cost to file for Chapter 7 bankruptcy.

Secured Credit Card Debt in Chapter 7

If you’re paying on secured credit charges when you file, you’ll have to choose to do one of the following on the Statement of Intention for Individuals Filing Under Chapter 7 form:

  • return the property to the store and wipe out the balance, or
  • keep the property and continue to pay on it.

Just because you want to continue paying the payment doesn’t mean that you’ll be able to keep the property in Chapter 7 bankruptcy. You’ll have to be able to protect any equity with a bankruptcy exemption. Otherwise, you might lose the property to the trustee.

Example. Suppose that you bought an expensive watch on credit worth $5,000. You owe $1,500 and can exempt (protect) $500 with a bankruptcy exemption. The Chapter 7 trustee could sell the watch, pay off the $1,500 credit account, give you your $500 exemption amount, and use the remaining funds to pay creditors.

You can find out more about protecting property by reading Bankruptcy FAQ: What Can I Keep in Chapter 7 Bankruptcy?

Questions for Your Attorney

  • My credit card company charged off my account three years ago and hasn’t tried to collect yet, do I need to worry?
  • What will happen if I keep the property that secures my credit card debt, but I don’t pay off the balance?
  • How long is a judgment for credit card debt good in my state?

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