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 people 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 following:

• how Chapter 7 helps when you're behind on credit card payments
• the types of credit card debt Chapter 7 will erase
• when a creditor might challenge a Chapter 7 discharge
• whether you can exclude a credit card from your bankruptcy
• how your Chapter 7 case will affect a cosigner, and
• when you can get a credit card after Chapter 7.

You'll also learn how to qualify for a Chapter 7 credit card discharge and whether credit card balances get paid in Chapter 7.

However, keep in mind that while Chapter 7 offers many benefits, it might not be the best bankruptcy chapter for you. Before moving forward, it's worth learning when Chapter 13 works better than Chapter 7.

Falling Behind on Credit Card Payments

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 the 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.

Erasing or "Discharging" Credit Card Debt in Chapter 7 Bankruptcy

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

• return 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 Purchased on Credit When Filing Chapter 7

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 give back the property if you couldn't pay.

However, that might not be the case if you charged 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 likely is secured. Other possible secured credit purchases include charges made on jewelry, furniture, appliance, computer, 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, you might be in luck because 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. Learn more about redeeming secured property in Chapter 7 bankruptcy.

Dealing with secured personal property in bankruptcy can be tricky, so consider consulting with a bankruptcy lawyer.

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 an 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 $800 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.

Cash advances. Cash advances are more straightforward than purchases of luxury goods and services. Suppose you use a credit card to take over $1,100 in cash advances within 70 days of filing bankruptcy. In that case, the bankruptcy court would presume the debt is fraudulent, regardless of how you used the money. (Both figures are valid as of April 2022 and will change in April 2025.)

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.

Fraudulently Obtaining Credit Accounts

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

If this sounds familiar, it might be best to stay away from bankruptcy. Misrepresenting your finances when applying for credit and using credit with no 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.

Using a Credit Card to Pay Tax Debt in Chapter 7

Another strategy you'll want to avoid is turning a "nondischargeable debt" that won't go away 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.

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.

Other Chapter 7 Bankruptcy Credit Card Questions

Yes, there's still more to know about erasing credit card debt in Chapter 7. Here are a few questions you might not have thought to ask.

Can I Exclude a Credit Card Account From Bankruptcy?

No, you must list all debts you owe. Even if you forget to list a zero balance account you hadn'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.

Will Chapter 7 Get Rid of My Cosigner's Responsibility to Pay My Credit Card Debt?

No. The bankruptcy filer's debt is the only debt erased. 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.

Can I Get 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 bankruptcy.

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

Chapter 7 bankruptcy filers must take and 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 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, which is why you sometimes hear the phrase "pay pennies on the dollar in Chapter 13 bankruptcy."

Find out more about how Chapter 13 bankruptcy helps people who don't qualify for a Chapter 7 discharge.

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 disperses money to creditors using a priority debt ranking system. Important debts, like back child and spousal support and recent tax debt, get 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 been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.