How Will Bankruptcy Remove My Credit Card Debt Liability?

Millions of Americans are struggling with credit card debt and by charging exorbitant interest rates and fees, credit card issuers have made it virtually impossible for consumers to pay off their credit card debt.  Moreover, the high pressure collection tactics employed by banks, credit card companies, and collection agencies often leave consumers with no other choice but to file bankruptcy.

What Is The Automatic Stay and How Does It Impact Credit Card Issuers?

Once a bankruptcy petition is filed, the automatic stay goes into effect and protects the debtor and his property from the collection efforts of creditors, including credit card companies.  The automatic stay prohibits creditors from contacting the debtor by phone or mail, repossessing or foreclosing on property, suing the debtor, or garnishing the wages or bank accounts of the debtor.

Because of the high pressure collection tactics used by credit card issuers and collection agencies, many consumers find themselves making payments they cannot afford and diverting funds away from rent, mortgage, utility, food, and other necessities.  The automatic stay instantly relieves the debtor of the pressure being exerted against him by the credit card issuers and allows him to use his money in a more practical manner.

Is Credit Card Debt Dischargeable In Bankruptcy?

When a debtor files a Chapter 7 bankruptcy, most of his unsecured debt will be discharged, including credit card debt.  When a debtor files a Chapter 13 bankruptcy, on the other hand, whether he will have to repay any of his unsecured debt depends on how much money he has available for payment into the Chapter 13 plan.  In Chapter 13 cases, the funds paid into the Chapter 13 plan are distributed as follows:

• To pay the administrative expenses of the case;
• To pay priority unsecured claims such as child support and certain tax claims;
• To pay secured claims, such as mortgages and auto loans; and
• To pay general unsecured claims.

If a Chapter 13 debtor has no money left after payment of the administrative, priority unsecured, and secured claims, then the credit card issuers as well as the other general unsecured creditors will receive nothing.  If there are funds left for distribution to general unsecured creditors after payment of the administrative, priority and secured claims, those funds will be distributed to the general unsecured creditors on a pro rata basis who, oftentimes, receive as little as one cent on the dollar.

Can Credit Card Issuers Challenge the Dischargeability of Credit Card Debt?

Credit card issuers may challenge the dischargeability of credit card debt in both Chapter 7 and Chapter 13 cases.  Such a challenge is initiated by the filing of an adversary proceeding, which is simply a lawsuit within the bankruptcy.  To prevail in a challenge to the dischargeability of credit card debt, the creditor must prove that the credit card was obtained by fraud or that the debtor had no intention of repaying the debt.

If a debtor has used a credit card infrequently in the months leading up to the bankruptcy, it's unlikely the card issuer will challenge the dischargeability of the debt.  However, there are certain red flags which may trigger a challenge including:

• Increased usage, including cash advances,  immediately prior to filing;
• Use of card for travel or vacations immediately prior to filing;
• Exceeding the credit limit;
• Using the card when unemployed or underemployed; and
• Using the card after consulting with a bankruptcy attorney.

Getting Legal Help with Credit Card Debt

If you have credit card debt and are considering bankruptcy, you should consult with a bankruptcy attorney.  He will review your credit card statements and other financial information and advise you as to whether you should file bankruptcy now or wait to file in the future in order to ensure that your credit card issuers will not challenge the dischargeability of your credit card debt.