Why Credit Card Debt Often Leads to Personal Bankruptcy

Credit card debt is the number one reason people file for personal bankruptcy, and it's no wonder. Credit card companies earn their profits by charging obscene interest rates and forcing their customers into paying minimum payments so that they can keep them on the hook for many years to come. Then, one late payment, and the interest rate climbs even higher (not to mention ridiculous late fees) and the chance of getting out from the debt becomes even less realistic.

Many people eventually turn to personal bankruptcy to get out for under that pile of debt and get the fresh start promised by the US bankruptcy court.

What Happens to Credit Card Debt in Bankruptcy?

Unsecured debts, such as credit card debt and personal loans, are almost always completely discharged by bankruptcy. The US Bankruptcy court puts credit card companies at the bottom of the list when determining what creditors should be repaid.

The idea is that a debtor who has become insolvent should be freed from unsecured debt so as to be able to stay on top of important monthly payments such as rent or a mortgage, education, utilities, groceries and other necessities.

What is the Downside?

The downside to bankruptcy is the effect on the debtors credit score. While it is not as bad as other options such as credit card debt settlement, bankruptcy will have a real effect on a debtors credit score, usually about fifty points.

After a few months of making timely bill and rent or mortgage payments though, the credit score will begin to come back, and usually after about a year, it will be at or above where it was before the bankruptcy petition was filed.

How Long Will it Take?

Depending on the type of bankruptcy filed (chapter 7 is the most common), bankruptcy will take between three months to five years (chapter 13 repayment plan take between three to five years). However, once the petition has been filed with the court, the credit card companies can no longer make any attempts to collect on debt due to the "automatic stay" law.

The automatic stay immediately halts all creditors from contacting the debtor, and also stops any pending foreclosure proceedings. As soon as the bankruptcy petition and other required schedules are received by the court, all creditors are contacted and informed of the bankruptcy petition, which puts into effect the automatic stay.

Talk to a bankruptcy lawyer today to find out if bankruptcy is an option for you, or if a bankruptcy lawyer will be able to "threaten" bankruptcy in order to negotiate a repayment plan for credit card debt.