How Does Bankruptcy Affect Your Credit
One of the primary reasons bankruptcy is typically considered a last resort is because it has significant negative consequences for your credit history.
For starters, a Chapter 13 bankruptcy will remain on your credit report for seven years, and a Chapter 7 will stay on there for 10 years. During this time, and especially during the first years, it can be very challenging to get approved for credit.
Of course, some lenders are willing to work with borrowers who have a bankruptcy on their credit report, but they’ll likely charge high interest rates and fees. A bankruptcy will also hurt your credit scores, which can complicate borrowing as well as things like employment and even your insurance premiums.
The good news is that it’s possible to recover after bankruptcy. As time passes from the date you filed, and you continue to add positive information to your credit reports through responsible credit behaviors, the impact of bankruptcy can soften. Recovery still won’t be a quick or easy path, though, so think carefully before you file.
When You’d File For Chapter 13 Instead
If you don’t pass the means test, you might qualify for debt relief under Chapter 13. Chapter 13 solves various financial problems Chapter 7 can’t and lets you pay important debts first.
For instance, when creating a budget, you’d set aside enough income to cover reasonable living expenses and use any remaining amount for your Chapter 13 payment.
The plan would pay overdue mortgage or car loan payments. Catching up on these amounts would let you keep the house orretain the car. You’d also pay off debt you couldn’t eliminate in bankruptcy, such as overdue tax debt and domestic support arrearages. The benefit here? You pay these amounts over time without fear of wage garnishment, bank levy, or property seizure.
You’d only pay credit card balances if any income remained. And even then, credit card accounts would share the remaining funds with other nonpriority unsecured debts, like unpaid rent and medical, utility, and cellphone bills. Most filers don’t pay much toward these low-priority bills, which is why you sometimes hear the phrase “pay pennies on the dollar in Chapter 13 bankruptcy.”
Find out more about how Chapter 13 bankruptcy helps people who don’t qualify for a Chapter 7 discharge.
Is Chapter 7 Bankruptcy Right For You
Make sure you know the difference between Chapter 7 bankruptcy vs Chapter 13 bankruptcy. Chapter 7 makes sense when:
You dont have many assets.
Your problem debts total more than 50% of your annual income.
Your problem debts can be discharged, or forgiven, by Chapter 7. These include debts such as medical bills, credit card debt and personal or payday loans.
It would take five years or more to pay off your debt, even if you took extreme measures.
Some debts typically cant be erased in bankruptcy, including recent taxes, child support and student loans. Bankruptcy still may be an option for you, though, if erasing other kinds of debt would free up enough money to pay the debts that cant be erased.
The other common form of consumer bankruptcy, Chapter 13, may be better if you have more assets or secured debts, and can repay some or all of what you owe.
Other debt relief options are available, too, such as a debt management plan through a agency. Take advantage of the free initial advice that credit counselors and many bankruptcy attorneys offer before deciding on a path.
Read Also: Can Sba Loans Be Discharged In Bankruptcy
When To Stop Using Credit Cards Before Filing Chapter 7
You’ll want to stop credit card use as soon as you realize that you can’t pay for your purchases and certainly as soon as you decide to file for bankruptcy. But before explaining why, you should know that an exception exists: You can use a credit card for life necessities, food, a winter coat, heating oil or propane, or needed car repairs, for instance, before filing for bankruptcy.
However, if you need to rely on this exception, keep good records of your expenditures so you’re prepared if a creditor questions your purchases. Now for the general rule.
Chapter 7 Gets Rid Of Credit Card Debt And Judgment Debts
When you file a Chapter 7 bankruptcy petition, you include all your debts. A Chapter 7 case discharges most, if not all, unsecured debts, including credit card debts and personal judgments from debt collection lawsuits.
You receive a bankruptcy discharge when you complete your Chapter 7 case. The bankruptcy discharge relieves your responsibility to repay a debt. In other words, if a debt is discharged in bankruptcy, you are not responsible for the payment of that debt. The creditor is not allowed to take any actions to collect a discharged debt.
Examples of debts that are eligible for a discharge in Chapter 7 include:
Old rent or lease payments
Medical bills and debts
Some old income taxes
Alimony, child support, and student loans are non-dischargeable debts. In a few cases, a debtor may be eligible for a hardship discharge for student loan debt. But alimony, child support, and a few other debts are never dischargeable in bankruptcy.
Read Also: What Does It Mean To File Bankruptcies
Role Of The Case Trustee
When a chapter 7 petition is filed, the U.S. trustee appoints an impartial case trustee to administer the case and liquidate the debtor’s nonexempt assets. 11 U.S.C. §§ 701, 704. If all the debtor’s assets are exempt or subject to valid liens, the trustee will normally file a “no asset” report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors are no asset cases. But if the case appears to be an “asset” case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. Fed. R. Bankr. P. 3002. A governmental unit, however, has 180 days from the date the case is filed to file a claim. 11 U.S.C. § 502. In the typical no asset chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time to file proofs of claim. Although a secured creditor does not need to file a proof of claim in a chapter 7 case to preserve its security interest or lien, there may be other reasons to file a claim. A creditor in a chapter 7 case who has a lien on the debtor’s property should consult an attorney for advice.
Is That Credit Card Right For The Post
Rebuilding your credit rating is an important first step after a bankruptcy discharge. One of the ways post-bankruptcy debtors rebuild their credit is by taking out a credit card but how do you know if the credit card is worth it or just another trap door leading to more debt? Below are few tips on how to choose the right credit card while rebuilding your credit after bankruptcy
Is the credit card issued by a major bank? You want a credit card that you can use just about anywhere and that will report your payments to one or more of the credit bureaus.
Does the credit card have a teaser rate or is the initial interest rate there to stay? One of the most common ploys of high interest rate credit cards is to get the debtor with a low teaser interest rate that skyrockets within a few months. Before you agree to taking on a credit card, read the fine print and find out what the true interest rate is.
Does the credit card have a grace period that allows you time to pay the balance without accruing interest? For post-bankruptcy debtors, having a grace period can help them avoid the slow slide into debt that landed them in bankruptcy in the first place. Smart post-bankruptcy debtors make sure that their credit card has a grace period with fair terms.
Chapter 13 Bankruptcy Qualifications
Generally, any individual, sole proprietor, or incorporated business is eligible to declare bankruptcy under Chapter 13. However, they must have less than $2,750,000 in unsecured and secured debts to qualify for Chapter 13 bankruptcy filings. Additionally, you cant file under the following conditions, but not limited to:
- You filed under chapter 13 or another chapter within the last six months
- A previous bankruptcy filing was dismissed due to the debtor not following court orders
- You havent received credit counseling six months prior to filing bankruptcy
Learn more aboutWhat Qualifies You For Chapter 13 Bankruptcy,
Chapter 7 Bankruptcy And Credit Card Debt
In Chapter 7 bankruptcy, you sell off some of your assets to pay a portion of your debts, and the rest of the amount owed is discharged, which means it is erased. Chapter 7 bankruptcy is typically a highly effective way to get rid of credit card debt, but there are some exceptions.
For example, if you used your credit card to buy a large amount of luxury items more than $675 worth shortly before filing bankruptcy, you may not be able to have that portion of your credit card debt discharged. Keep in mind that the word luxury in this context does not just refer to jewelry and spa services. It means anything you didnt need in order to live.
Another example of credit card debt that Chapter 7 may not erase is a credit card charge for a non-dischargeable debt. Student loans, back taxes, alimony, and child support are all examples of non-dischargeable debt. If you used your credit card to pay for these, those charges may not be discharged through Chapter 7 bankruptcy.
Don’t Miss: Do You Lose Everything When You File Bankruptcy
Should I Use My Credit Cards Before I File For Bankruptcy
If you run up the balances on your credit cards in a certain time period before deciding to file bankruptcy, there may be a similar result as with intentionally maxing your cards out before filing bankruptcy. You could face consequences if you take out a cash advance or buy a luxury good before bankruptcy, even if you intend to pay it off. You may have to prove you didnt have fraudulent intent.
According to U.S. Code § 523, if you use your credit cards within 90 days of filing for bankruptcy for any luxury goods or services totaling over $800, this debt will not be discharged. It may also occur if you take cash advances totaling over $1,100 within 70 days of filing for bankruptcy. These rules apply up to and potentially beyond March 31, 2025.
Under these laws, credit card usage may not be problematic if used only for necessary goods or services such as buying gas or food. That said, please be advised not to use credit cards or incur any additional debt once you have decided to file bankruptcy.
Guidelines For Proving Non
To prove fraud, the non-dischargeability must file within 60 days after the 341 meeting takes place or 90 days after the bankruptcy case files. Any objection is due by these dates. Whether the person is a creditor or trustee, they must file the objection to discharge within these periods.
Plus, the burden of proof is generally on the creditor, not the debtor. Taking out cash advances or purchasing unnecessary luxury items like Rolex watches days before you file for bankruptcy will be ruled as fraud. However, if the creditor wins all that he wins is a judgment for the amount of the Rolex watch. You still dont have to repay the rest of the credit card. Remember, it is always hard for a bankruptcy judge to pity a person who owns a Rolex watch or more than the judge owns.
Read Also: Houses That Are Foreclosed
Will Chapter 7 Get Rid Of My Cosigner’s Responsibility To Pay My Credit Card Debt
No. The bankruptcy filer’s debt is the only debt erased. For instance, suppose you and your mother open a credit card account together and are both responsible for the bill. You’re cosigners. A Chapter 7 discharge will erase your responsibility to pay the credit card balance, but your mother will remain obligated to pay the bill.
Chapter 13 works a bit differently. Creditors can’t collect from cosigners during the Chapter 13 bankruptcy, and you can fully protect your cosigner by paying the total debt in your Chapter 13 plan.
How To Get Rid Of Credit Card Debt Through Bankruptcy
Excessive debt is one of the major reasons why people file for bankruptcy. In many cases, the excessive debt is the result of paying for necessities such as medical bills and vehicle repairs. While there are some exceptions, most credit card debt can be discharged when a person successfully completes Chapter 13 or Chapter 7 bankruptcy.
Don’t Miss: When Should You Consider Filing Bankruptcy
Why Shouldnt I Max Out My Credit Cards Before Filing For Bankruptcy
The goal of bankruptcy is to restructure or eliminate any debt you are not able to pay off in good faith, including credit card debt and medical bills. However, if you rack up credit card debt in bad faith, without any intention of paying it off , this behavior could be considered intentionally fraudulent.
The credit card company may file a complaint against you and ask the court to make your debt non-dischargeable. Unfortunately, if the court makes this ruling, your debt wont be discharged, and youll have to pay it off. The worst outcome would be that your bankruptcy petition is completely denied and dismissed as to all creditors.
For a legal consultation, call
Finding The Best Bankruptcy Attorney
Bankruptcy is a powerful legal option if you cannot use other debt relief methods. Dont worry about what others might say if you are thinking about bankruptcy. Your finances are your personal choice. There is nothing wrong with choosing the best option for your situation.
Contact an attorney as soon as you can so that you understand all the facts about this crucial decision. Choosing the right attorney can be a challenge. Before you make up your mind, ask questions, discuss your goals, and remember that you are paying them. Be sure to check references, reviews, and consumer complaints.
Also Check: The Bureaus Collection Agency
Could Other Debt Alternatives Provide Relief
A legal process, filing for bankruptcy can help reduce the majority of your debts. It is regulated by the Bankruptcy and Insolvency Act. The first step is to contact your local MNP LTD Licensed Insolvency Trustee, who will discuss and explain all of your options based on the assessment of your debt situation. Many times, after hearing of other options available, people have realized declaring bankruptcy wasn’t their best choice.
Can I Be Sued After Bankruptcy
No. One of the benefits of filing for bankruptcy is that it prevents creditors from taking you to court. It also prevents creditors from engaging in further collection attempts. After filing bankruptcy, the automatic stay prevents credit card companies from calling you, sending letters and engaging in similar activities.
Recommended Reading: Debt To Gdp Us
The Schemes That Lead To Business Bankruptcy Fraud
Commonly, a person goes into business but doesnt know how to keep records. In the case of a business debtor who fails to keep records and cant account for funds, the worst-case scenario is that they are denied the ability to receive a discharge. It is impossible to list all the different schemes a business insider can use to charge up business debts and then attempt to bankrupt the debts. But, proving business fraud in bankruptcy filing is hard. After the assets are gone, it might be impossible to recover those assets. Interestingly, consumers are amateurs compared to the ability of executives to raid their own business or bank assets and commit fraud.
Is Credit Card Debt A Good Reason To File Chapter 7
Yes, Chapter 7 bankruptcy erases almost all credit card debt. So, if you owe far more than you think you can pay, Chapter 7 can likely help you get back on your feet and stay there. If you are paying the minimum payments on your credit cards each month, it could take you 10 or 15 years to pay off the credit card debt, depending on the balances on your credit cards and the interest rates.
Paying the minimum payments on credit cards can cost you thousands of dollars that you don’t have to pay. Also, if you miss even one payment, the credit card company could raise your interest rate substantially. For most people, credit card debt is the main reason they need to seek debt relief.
Don’t Miss: How Many Times Has Donald Trump Filed Bankruptcy
Chapter 7 For Credit Card Debt: How It Works
While still in debt, credit card issuers may:
- Raise your interest rates
- Give your account to a debt collection agency
- Deny new credit card applications
- File a debt collection lawsuit to try to claim repossessions
Collection agencies can call you at home or work and demand payment of your total debt. This harassment is legal unless you file a Chapter 7 or use another method to stop creditor harassment.
Speak to a bankruptcy attorney to decide if Chapter 7 bankruptcy is right for your financial situation. Once you file for bankruptcy, you will get an “automatic stay” that:
- Stops creditors from calling
- Erases unsecured credit card debt
- Stops wage garnishment for debts
- Appears on your credit history and lowers your credit score