Credit Card Debt in Chapter 7 Bankruptcy

Almost every Chapter 7 bankruptcy case includes credit card debt, so if you're wondering whether eliminating credit card debt in Chapter 7 bankruptcy is a good idea, the answer is "Yes." Many have used Chapter 7 bankruptcy to erase credit balances and fix financial problems. Chapter 7 wipes out most credit card balances within a few months, and you won't need to pay anything to discharge the debt.

If you're interested in using Chapter 7 to eliminate a heavy credit card burden, you'll want to understand the types of credit card debt Chapter 7 will erase, when a creditor might challenge a Chapter 7 discharge, how your Chapter 7 case will affect a cosigner, when you can get a credit card after Chapter 7, and more.

Erasing Credit Card Debt in Chapter 7 Bankruptcy

When money is tight, turning to credit cards to buy things you need is natural. But when finances don't improve, and credit card balances increase, it can become challenging to make monthly payments. Chapter 7 can provide relief by eliminating many different credit card obligations, including balances on major credit cards, department store credit lines, gas cards, and more.

Even though filers commonly use Chapter 7 to erase credit card balances, you can't always wipe your hands clean of the debt. Here are a few things you might have to do:

• return the property you agreed would serve as collateral
• pay for luxury purchases and cash advances charged shortly before bankruptcy
• repay a tax bill or another nondischargeable debt, or
• retain responsibility for paying a debt incurred through fraud.

If you don't have any of these situations, skip ahead.

Returning Property Bought With a Credit Card

In most cases, you won't need to return the property you bought on your credit card because most credit card obligations are "unsecured" debts. When you applied for the account, you didn't agree to return the property if you couldn't pay.

However, that might not be true if you financed an expensive item. For instance, you could have a "secured debt" if you bought a piece of jewelry, a TV, or a kitchen appliance. A creditor with a secured debt can repossess the property if you don't pay what you owe, even when you file for Chapter 7 bankruptcy.

The most common culprits? If the credit card company requires you to keep a balance in a savings account, the credit card is likely secured. Other possible secured credit purchases include charges made on jewelry, furniture, appliances, computers, electronics, and mattress accounts. Check the receipt or the credit contract for verification.

What can you do if you want to keep the property? If you want to keep a secured item but owe more than it's worth, Chapter 7 has a solution. You can file a motion asking the court to let you "redeem" the property by paying its actual value instead of the full amount owed.

Because dealing with secured personal property in bankruptcy can be tricky, consider consulting with a bankruptcy lawyer. Learn more about redeeming secured property in Chapter 7 bankruptcy.

When You'll Remain Responsible for a Credit Card Debt in Chapter 7 Bankruptcy

Credit card charges don't always go away in bankruptcy. If the Chapter 7 trustee or a creditor objects to the discharge, you might have to pay back particular charges or the entire credit account. Here we explain situations to watch for, and the process the trustee or a creditor must use when objecting to a discharge.

Paying Back Charges for Luxuries and Cash Advances

Certain types of credit purchases made before filing for bankruptcy are automatically "presumed" fraudulent, and you could have to repay the charges.

Luxury goods and services. If you use a credit card to buy more than $900 worth of luxury goods or services within 90 days of filing for bankruptcy, the debt would be presumed nondischargeable. Reasonable amounts of food, clothing, and gasoline wouldn't fall within this rule, nor would your usual rent or utility bills. (11 U.S.C. § 523(a)(2)(C)(i)(l); amount applies to cases filed between April 1, 2025, and March 31, 2028.)

Cash advances. Cash advances are more straightforward than purchases of luxury goods and services. Suppose you use a credit card to take out over $1,250 in cash advances within 70 days of filing for bankruptcy. In that case, the bankruptcy court would presume the debt is fraudulent, regardless of how you used the money. (11 U.S.C. § 523(a)(2)(C)(i)(ll); amount applies to cases filed between April 1, 2025, and March 31, 2028.)

The luxury and cash advance presumption isn't absolute. You'd have an opportunity to prove you reasonably believed you could repay the charge and intended to do so. However, satisfying the standard isn't necessarily easy, especially since most people are insolvent shortly before bankruptcy.

Fraudulently Obtaining Credit Accounts

Not everyone is honest when applying for credit. Some people inflate their income or falsify asset documents to increase their chances of approval. Others use credit with no intention of paying the charge.

If this sounds familiar, it might be best to avoid bankruptcy. Misrepresenting your finances when applying for credit and using credit without the intention of paying is considered fraud.

A bankruptcy court that finds you committed fraud could hold you responsible for paying the account and impose other serious fraud consequences, such as dismissing your case or referring the matter to the FBI for investigation.

Paying Tax Debt With a Credit Card

Another strategy you should avoid is turning a "nondischargeable debt" that will not disappear in bankruptcy into a debt you can "discharge" or erase in bankruptcy.

For instance, suppose you learn you can eliminate your credit card debt in Chapter 7 but not your tax debt. It might seem like a good idea to pay off the tax debt with the credit card and wipe out the credit card balance in the Chapter 7 case, right?

Not necessarily. Tax debt paid with a credit card survives Chapter 7 if the credit card company objects to the discharge. But here's a strange twist of bankruptcy law. You can wipe out tax debt paid with a credit card in Chapter 13.

Chapter 7 Credit Card Discharge Challenges

It's possible to discharge credit card debt even when one of the abovementioned problems exists. The discharge order issued at the end of the case will erase the debt if the company does nothing, either because it didn't notice the issue or does not think it's financially worth pursuing.

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 court sets the deadline for filing complaints challenging the dischargeability of a credit card debt. The date is found in the court's 341 meeting of creditors notice.

Excluding Credit Card Accounts From Bankruptcy

You can't do it and must list all debts you owe. Even if you forget to list a zero balance account you haven't used in a long time, the creditor would discover the bankruptcy on your credit report and close the account.

However, sometimes smaller creditors let a bankruptcy filer keep an account open, although it's rare. For instance, debtors have successfully kept open small pet medical accounts that they routinely pay off. As with all debts, you'd remain responsible for all charges made after bankruptcy. Talk with your local bankruptcy attorney about the practices in your area.

Learn more about keeping a credit card in Chapter 7 bankruptcy.

Chapter 7 and a Cosigner's Payment Responsibility

The discharge erases the bankruptcy filer's debt only. 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.

Getting a Credit Card After Chapter 7 Bankruptcy

After your bankruptcy case, you'll probably be surprised by how easy it is to get credit. Many people are considered reasonable credit risks shortly after bankruptcy and begin receiving credit offers soon after their bankruptcy case closes. Here's why:

• You won't be able to discharge the new credit in a Chapter 7 case for eight years.
• You should be able to stay current on your monthly payment because you'll have eliminated your credit card accounts, medical balances, and other qualifying debt.
• Many bankruptcy filers stay within their means to avoid another bankruptcy filing.

Get off to a good start and learn about rebuilding credit after filing for bankruptcy.

How Do I Qualify to Discharge Credit Card Debt in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy filers must pass the Chapter 7 "means test" before wiping out credit card balances and other debt. If you can afford to pay some or all of your credit card debt, you might not qualify to file a Chapter 7 bankruptcy case.

The means test works by comparing your income to your household expenses. If you have money left over, called "disposable income," and fail the means test, your best option might be to file a Chapter 13 case instead.

Qualifications for Filing for Chapter 7 Credit Card Debt Bankruptcy

You can pass the means test in one of two ways.

If your family's income is less than the "median" or the average income a family of the same size earns in your state, you'll qualify automatically. If your family's income is higher than the median, the means test will calculate whether you have income left over to pay creditors after considering reasonable living expenses.

If you fail the means test because you have disposable income you can use to pay creditors, you might still qualify for a Chapter 7 case in a few unusual instances. For instance, you might qualify if most of your debt is business debt, you're an active military member, or you have other particular circumstances, such as higher medical or utility costs than the average family.

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 that 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 or retain 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, so you sometimes hear the phrase "pay pennies on the dollar in Chapter 13 bankruptcy."

Find out when Chapter 13 works better than Chapter 7 bankruptcy.

Will My Credit Card Balances Get Paid in Chapter 7 Bankruptcy?

Usually not. Most Chapter 7 bankruptcies don't pay anything to creditors because there's no money to distribute. Many Chapter 7 filers can protect everything they own with bankruptcy exemptions, leaving no property for the Chapter 7 trustee appointed to the case to seize and sell for the benefit of the creditors. These cases are called "no-asset cases."

In Chapter 7 "asset cases," which are somewhat rare, money is available for creditors. The trustee distributes the money using a priority debt ranking system. Significant debts, like back child and spousal support and recent tax debt, are paid first.

Less important nonpriority unsecured claims, like credit card debts, fall to the bottom of the list. So, it's unusual for a credit card company to receive payment in Chapter 7, but that's not to say it doesn't happen.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.