Credit card debt: How bankruptcy can rescue you from creditors’ lawsuit

August 10, 2023

(By Miranda Owen)
The third largest source of household debt in the country is credit card debt. It is right behind mortgage and college debt respectively. According to the latest household indebtedness statistics: The Federal Reserve reported as on February 2014 that the total credit card debt in the country stood at $854.2 billion with an average household owing $15,191 (April 2014) on their credit cards.

Average mortgage debt as well as student loan debt in April 2014 are $154,365 and $33,607 respectively.

The American Bankruptcy Institute’s Annual Business and Non-Business Filings on a year on year basis (1980-2012) found that overall nonbusiness bankruptcy filings recorded in 2012 were 1.18 million, a sharp decline from 1.36 million in 2011. Analysts are of the opinion that this decline in the number of bankruptcy filings is not because of debt repayment but due to increased instances of defaults. Hence, if repaying your outstanding credit card balances is overwhelming you, then filing for a Chapter 7 bankruptcy discharge may rescue you from creditors’ lawsuits or any any other subsequent penalties like liens or wage garnishment. When filing for Chapter 7 bankruptcy is advisable?

Filing for Chapter 7 bankruptcy is advised when you encounter some of the following:

  • When you’ve been slapped with lawsuits and being harassed
  • day in and day out for debt repayments.
  • When your credit card bills are no longer affordable to you.
  • The value of exempted and non-exempted assets in your state of residence.
  • The fate of your credit card debt in Chapter 7 bankruptcy

Primarily, you may have your credit card debt discharged under Chapter 7 bankruptcy. Usually, debts like these are regarded as any other unsecured claims in this type of bankruptcy. Fortunately, if you have sufficient reserve of money, then your Chapter 7 trustee will be able to pay off a certain amount of your credit card debt with that of the other unsecured claims.

Mostly, as a debtor, your obligation to pay off the outstanding credit card balances will be discharged, provided the case has been successfully closed. Still, there do lie some exceptions, particularly when instances of fraud are suspected. When bankruptcy estate is used to pay off credit card debt Credit card issuers are considered as your creditors with respect to your Chapter 7 bankruptcy petition.

A lot of cases under Chapter 7 bankruptcy are “no asset” ones. So, there is actually no asset in the bankruptcy estate that the trustee can liquidate in order to raise funds required to pay off the creditors’ dues. As a result, in a “no asset Chapter 7 bankruptcy” case whatever funds are collected is used to pay back the creditors in order of their priorities.

Keeping this fact in mind, credit card debts are also regarded as nonpriority claim just the way many other unsecured debts are considered. Rarely do the nonpriority creditors get any repayments in a Chapter 7 bankruptcy. However, payments, even though they are paltry in amount are made to these category of creditors on a pro rata basis. In this way, each and every creditor (including any credit card issuer) gets the same percentage of his or her claim similar to that of the other unsecured creditors. The repayment amount are generally, negligible or at most, pennies on the dollar.

Exceptions in case of discharging credit card debt: Most of the bankruptcy petitioners have the sole motive of having their debts discharged and to gain a fresh opportunity to start off with their financial lives once again. A lot of credit card debts get discharged under Chapter 7 bankruptcy. This implies that your obligations to pay back your credit card balances will stand null and avoid once your bankruptcy case is complete. Still, there are certain exceptions to the dischargeability of your credit card debts. The important points to be remembered here is that credit card fees charged because of fraudulent activities, fake pretenses, fake misrepresentation, suppression of facts, hiding assets etc, will be considered a federal crime and, thus they are nondischargeable. Here are two scenarios for which charges incurred are considered to be fraudulent:

Cash advances – Speaking of credit cards, then if you take out a cash advance worth of over $925 within 70 days of filing in your bankruptcy petition, then that debt would be a nondischargeable one, irrespective of the fact that you’ve used the money on a luxury item or anything else. In this case, any exceptions permitted in related to the dischargeability of debt incurred due to the purchase of luxurious goods as well as cash advances aren’t absolute whatsoever.

As per the Bankruptcy Code, it will be deemed as fraudulent, fake or manipulation for any charges made with respect to the luxurious goods and cash advances. These purchases have a set limit though. The onus will lie on you to prove that you had the best of intentions to repay the loan and had appropriate reasons to believe that you could’ve paid back the amount at the time of purchasing it. However, this is what makes it difficult to do.

Luxurious goods – Any purchase made using your credit card that amounts to above $650 within 90 days of filing for bankruptcy protection, then the court will presume that such a purchase is a nondischargeable financial obligation.

Bankruptcy law clearly excludes luxury goods and services to that from necessary goods and services bought to fulfill the needs of your dependents. Take for instances, debts incurred as a result of purchasing food, gasoline or clothing aren’t generally tagged as luxury goods. Finally, if your creditors believe that certain debts are nondischargeable, then they should lodge a complaint with the competent bankruptcy court. In absence of a proper complaint, your creditors won’t be able to claim even for the luxury goods as well as cash advances from getting discharged, including all the other obligations against you. Here, in Chapter 7 bankruptcy, they are given a deadline of 60 days after the meeting of the creditors to file their complaints.

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