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.
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More so than any other financial topic, bankruptcy is both complicated and depressing. Think about it: Mortgages are also complex, but after you navigate the process, you own a house!
Bankruptcy, however, is simply a fresh start, says the federal government. Unfortunately, the governments explanation of the process isnt exactly user-friendly its called Bankruptcy Basics, but it looks like this. Not very basic, is it?
So here are three crucial things to know, Vanessa
Should I Max Out My Credit Cards Before Filing For Bankruptcy
Debtors who run their credit card balances up before they file for bankruptcy could suffer consequences. Primarily, it could result in your debt becoming ineligible for discharge, which is often the whole point of filing for bankruptcy. So in many cases, running your credit card debt up is not worth it.
To fully understand how this works, it helps to understand the basics of credit card debt when you are filing for bankruptcy, which we will dive into below.
If you have further questions after reading this article or need help filing for your Chapter 7 bankruptcy or Chapter 13 bankruptcy, contact the Indianapolis bankruptcy attorneys at Sawin & Shea, LLC.
Should I Keep Paying My Credit Cards If Im Going To File Bankruptcy
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In a Nutshell
Itâs important to understand that you donât have to be late on credit card payments to file bankruptcy. But at the same time, if you’re facing a hardship and are struggling to make ends meet each month, it’s absolutely ok to fall behind on payments before filing bankruptcy.
Written byAttorney Paige Hooper.
High interest rates and fees can make it hard to afford your monthly credit card payments. You might feel like you must choose between paying your credit card bills and paying your utility bills and other living expenses. Bankruptcy may be a way out of a bad financial situation. Chapter 7 bankruptcy can eliminate credit card balances and other debt, and give you a fresh start, usually within a few months.
Many people worry that falling behind on their credit card monthly payments before filing bankruptcy will look bad on their credit report and destroy their . But thatâs typically not the case. This article covers how bankruptcy affects credit cards, why itâs OK to miss payments right before you file your case, and why itâs usually not a good idea to pay off your credit card before filing bankruptcy.
How A Creditor Challenges Your Chapter 7 Credit Card Discharge
It’s possible to discharge credit card debt even when one of the problems described above exists. If the credit card company doesn’t notice the issue, doesn’t think it’s financially worth pursuing, or, simply put, does nothing, the debt will get erased.
A credit card company that wants the bankruptcy court to find a debt nondischargeable must file an “adversary proceeding” lawsuit with the bankruptcy court. If the creditor doesn’t file a case, the charges will get discharged along with other obligations.
If you’re served with a nondischargeability complaint, you must file a timely answer to dispute the creditor’s claim. The bankruptcy court will hold a hearing before deciding whether to discharge the debt.
In Chapter 7 bankruptcy, the deadline for filing complaints challenging the dischargeability of a credit card debt is set by the court. You’ll find the date in the 341 meeting of creditors notice sent by the court.
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The Details Of The Bankruptcy Case:
The 74-year-old debtor applied for a Lowes credit card on March 15, 2008. She said she had an annual income of $48,000. In fact, her only income was $667 in monthly Social Security payments. Her credit application was approved with a credit line of $12,500. Between May 13 and May 16, the debtor used the card to purchase approximately $5,000 worth of gift cards. There was a balance of $6,039 on the account when she filed for Chapter 7 relief on Aug. 29, 2008. Prior to filing for bankruptcy, the debtor made three payments on the account totaling $160.
The bankruptcy court ruled that the debtors intention of repaying the cards was not based on any real ability to repay and that since the creditor had relied on the debtors false income statement the debt should not be discharged in bankruptcy.
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Continue To Pay Your Credit Cards When Bankruptcy Isnt Necessary
When considering bankruptcy, the first thing to consider is whether you can afford to pay off your credit cards. Why? Because you wont be able to file for Chapter 7 bankruptcy if you earn enough money.
Filers with substantial discretionary income are required by the court to pay part or all of their credit card debt via a Chapter 13 repayment plan. A bankruptcy will also stay on your credit record for seven to 10 years. As a result, its important to think about all of your choices first.
Using Chapter 7 Heres How To Declare Bankruptcy On Credit Cards
When wondering how to file bankruptcy on credit cards, filing for Chapter 7 bankruptcy is a common preference for those who qualify for this option. To file for Chapter 7, you must have a limited number of assets. If you pass a means test that shows your lack of assets, you then have the option of filing under Chapter 7.
Often with a Chapter 7 filing, the bankruptcy administrator will determine what assets you have available that you could sell to satisfy your debts, as well as any disposable income you have available. The administrator then will use this money to pay some of your creditors. You often will not have to pay the remainder of your debts.
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Create A Debt Repayment Plan
You can also ask the collector if you can pay what you owe back with a payment plan. With a short-term payment plan, youll pay your debt back on a fixed schedule with set payments. You could also consider a debt management plan, which helps set up monthly payments to be paid to your collectors. Make sure to consider debt management plan pros and cons to see if this is a good fit for you.
Debt Settlement Vs Bankruptcy: Which Is Better
If everyone in debt found themselves in the same predicament, there might be a blanket answer to this question. Of course, thats not the case, and where debt settlement may be the right option in one situation, bankruptcy might be preferable in another. And in a third scenario, neither may be the best solution.
The bad news is that resolving serious debt woes is not a one-size-fits-all proposition. The good news is that there are many potential routes out of debt, and a nonprofit credit counselor such as the ones at InCharge Debt Solutions are well-equipped to help point you in the right direction whether it be debt settlement, bankruptcy, or other debt relief options such as debt consolidation.
Before choosing a particular option, speak with a credit counselor at InCharge, who can evaluate your specific situation and discuss the pros and cons that each potential solution offers.
If bankruptcy is ultimately determined the best option for escaping your debt crisis, InCharge Debt Solutions offers bankruptcy education classes that allow you to complete the credit counseling and debtor education requirements for entering and exiting bankruptcy. The classes, which include online instruction and a personal counseling session via telephone, provide advice on your current financial situation and instruction on money management, budgeting and how to develop and stick to a plan that will lead to a brighter financial future.
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Chapter 7 Bankruptcy: What It Is And How To File
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Chapter 7 bankruptcy can wipe out many forms of overwhelming debt under the protection of a federal court. You may have to give up some assets, like an expensive car or jewelry, but the vast majority of filers do not. Chapter 7 bankruptcy is the fastest and most common form of bankruptcy.
Chapter 7 bankruptcy erases most unsecured debts, that is, debts without collateral, like medical bills, credit card debt and personal loans. However, some forms of debt, such as back taxes, court judgments, alimony and child support, and student loans generally arent eligible. Chapter 7 bankruptcy will leave a serious mark on your credit reports for 10 years. During this time youll likely find it harder to get credit. Even so, youll probably see your credit scores start to recover in the months after you file.
Read on to learn about how you can qualify for Chapter 7 bankruptcy, how to file, whether this debt relief option is right for you, and how to rebuild after bankruptcy.
How Filing Bankruptcy Will Affect Your Credit
The problem with falling behind on your credit card payments is that your credit score takes a dive. Many people worry that filing bankruptcy will severely impact their credit, and they are right in the sense that Chapter 7 bankruptcy can negatively affect your credit for 10 years and Chapter 13 can do so for seven years.
However, because you are considering bankruptcy for credit card debt, the impact of bankruptcy on your credit may actually yield a net positive effect over time. Your credit score may go lower after bankruptcy, but you will not have to worry about the continual impact of credit card debt on your score. As you make sound financial decisions and manage your debts well, you will likely see your credit score start to rise.
A qualified bankruptcy lawyer can help you understand the total effect of filing bankruptcy on your credit.
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Filing Bankruptcy: The Pros
While it shouldnt be undertaken lightly, bankruptcy can be a much-needed life raft for consumers who are drowning in debt. Heres a look at some of the benefits of filing for bankruptcy.
Youre granted an automatic stay
The instant you file, you are protected under a provision in bankruptcy law called the automatic stay. Creditors cannot pursue payment of your debts or take other actions against you until the bankruptcy is discharged or a repayment plan has been finalized.
Youll get relief from dealing with multiple creditors
Filing bankruptcy can mitigate the pressure and overwhelming nature of handling numerous creditors. In fact, you may experience immediate relief once your debts are discharged and you no longer have to repay some or all of your financial obligations.
Youll receive a court-appointed representative
Once you file your petition for bankruptcy, youll be assigned a trustee who will see your case through to discharge. They will operate on your behalf throughout the process, including handling all communication between you and your creditors, and in the case of Chapter 13 bankruptcy, they will be the one to receive and process your payments.
Bankruptcy can prevent further legal action
You may be able to keep some assets
Some back taxes can be addressed
Bankruptcy may prevent home foreclosure or car repossession
Your debts may be settled for less than what you owe
Some debts will be completely written off
Youll get a fresh start
Is It Better To Pay Off Debt Or Declare Bankruptcy
Caitlyn is a freelance writer from the Cincinnati area with clients ranging from digital marketing agencies, insurance/finance companies, and healthcare organizations to travel and technology blogs. She loves reading, traveling, and campingand hanging with her dogs Coco and Hamilton.
At a Glance
Filing for bankruptcy may seem like your only option, especially if you feel like youre drowning in debt and have struggled to pay it off. It can feel like the best way out, stopping contact from collection agencies, wage garnishments, and even potential lawsuits. It can also eliminate various types of debt like credit card debt, medical bills, personal loans, and more.
However, filing bankruptcy doesnt clear all debt, and can have a significantly negative impact on your credit score and future finances. Deciding whether to pay off debt or declare bankruptcy is a huge decision that shouldnt be taken lightly, but the good news is you have options.
In this article, youll find information about:
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Things To Consider Before Filing For Bankruptcy
Before filing for bankruptcy, there are debt relief options that you should consider. There are also some things you should avoid.
If you are struggling financially, you may have enough resources to right the ship, and not even realize it.
Talking to a counselor from a nonprofit credit counseling agency is a good first step, no matter what direction you end up going. A session with a nonprofit debt counselor is free of charge. They will review your finances and discuss the pros and cons of debt management plans, debt consolidation loans and debt settlement, as well as bankruptcy.
A credit counselor will help create a budget with you, but you can take that step on your own. A budget will help you get a realistic picture of what your finances really are. Creating a budget doesnt have to be complicated. Its simply a tool that helps you keep track of how much money you have coming in and how much your monthly bills and other expenses cost you a month. To make it work, review it frequently and find ways to cut expenses, if possible.
You should also consult a bankruptcy attorney, even if you plan to file bankruptcy on your own. The initial consultation is free, and you may learn some valuable information about your bankruptcy case.
You may want to consider taking a second job or selling some assets to help pay down debt.
Also, take a hard look at your debt. Is there a way to negotiate it down, lowering interest or fees? Is it a temporary situation or a longer-term problem?
Are You Being Sued Or Harassed
If you stop making payments on your credit cards, you’ll typically begin receiving numerous calls from the credit card company or its agents. The more delinquent you are, the more frequent and harassing the calls will become. For most people, the constant harassment from debt collectors leads them to consider bankruptcy relief.
Depending on your assets and the amount of debt you owe, the credit card company could decide to bring a lawsuit to collect its debt. If the credit card company obtains a money judgment against you, it will be able to garnish your wages or go after your assets to satisfy the debt. If you’re facing a lawsuit or the credit card company isn’t willing to work with you, it might be time to consider your bankruptcy options.
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