What bankruptcy does to credit card debt
Bankruptcy is a legal process where a court helps you deal with debts you cannot pay. For credit card debt specifically, bankruptcy can eliminate what you owe entirely — the court discharges it, meaning the credit card company can no longer collect. You stop making payments, and the debt goes away. This is different from debt consolidation or settlement, where you still pay something.
There are two main types of bankruptcy that affect credit card holders: Chapter 7 and Chapter 13. Chapter 7 wipes out unsecured debts like credit cards completely. Chapter 13 sets up a repayment plan where you pay back a portion of what you owe over three to five years, and the rest is discharged at the end. Which one you can file depends on your income, assets, and how much debt you have.
Filing bankruptcy stops collection calls and lawsuits when ready through something called the automatic stay. The moment you file, creditors must stop trying to collect. This applies even if a credit card company has already sued you or garnished your wages.
Key Takeaways
- Chapter 7 bankruptcy erases credit card debt entirely if you pass the means test, which compares your income to your state's median income.
- Chapter 13 bankruptcy sets up a repayment plan lasting three to five years, after which remaining credit card debt is discharged.
- You must file through federal bankruptcy court in your district, and you need to hire a bankruptcy attorney or work with a legal aid office if you cannot afford one.
- Bankruptcy stops collection calls and lawsuits when ready, but it damages your credit score and stays on your credit report for seven to ten years.
- Before filing, you are required to complete credit counseling through an agency approved by the U.S. Trustee.
Chapter 7 bankruptcy and the means test
Chapter 7 is the faster option — it typically takes three to six months from filing to discharge. But you can only use it if you pass the means test, a calculation that compares your average monthly income over the past six months to the median income for your household size in your state. If your income is below the median, you pass automatically. If it is above, the test subtracts allowed living expenses and debt payments from your income; if what remains is low enough, you still pass.
The means test exists because Chapter 7 erases debt rather than repaying it. The court wants to make sure you are not using Chapter 7 when you actually have money to pay creditors back. If you fail the means test, you can still file Chapter 13 instead, or you can challenge the test result with your attorney if your circumstances are unusual.
In Chapter 7, a trustee is appointed to your case. The trustee's job is to sell any assets you own that are not protected by exemptions — your house, car, or savings, depending on your state's rules — and use the money to pay creditors. However, most people filing Chapter 7 have few or no assets to sell, so creditors receive little or nothing, and the remaining debt is erased.
Chapter 13 and the repayment plan
Chapter 13 is for people who earn too much to pass the means test, or who want to keep their assets and catch up on debts over time. Instead of erasing debt, Chapter 13 creates a court-approved repayment plan. You pay a trustee a set amount each month for three to five years, and the trustee distributes that money to your creditors according to the plan. At the end, any remaining unsecured debt — including credit cards — is discharged.
The length of your plan depends on your income. If your income is below your state's median, the plan lasts three years. If it is above, the plan lasts five years. Your monthly payment is calculated based on your disposable income after allowed expenses, so it may be much less than what you currently owe.
One advantage of Chapter 13 is that it stops foreclosure or repossession. If a creditor is about to take your house or car, filing Chapter 13 halts that process, and you can catch up on missed payments through the plan. Credit card debt is treated as unsecured, so it is paid last — your mortgage, car loan, and other priority debts are paid first.
Finding a bankruptcy attorney and understanding costs
You are required to work with a bankruptcy attorney to file. The court will not accept a bankruptcy petition from someone representing themselves in most cases. Attorney fees vary by location and case complexity, but typically range from $1,000 to $3,000 for Chapter 7 and $2,500 to $6,000 for Chapter 13. Many attorneys allow you to pay fees in installments, and some will include the fee in your Chapter 13 repayment plan.
If you cannot afford an attorney, contact your local legal aid office. Legal aid provides free or low-cost representation to people below certain income thresholds. You can find your local office through the Legal Aid & Defender Association or by searching "[your state] legal aid".
Before you meet with an attorney, gather documents: recent pay stubs, tax returns from the past two years, a list of all debts with creditor names and amounts owed, and a list of your assets and monthly expenses. This speeds up the process and helps your attorney give you an accurate fee quote.
Credit counseling and the filing process
Before you can file bankruptcy, you must complete a credit counseling course through an agency approved by the U.S. Trustee, the office that oversees bankruptcy cases. This is a one-time course, usually one to two hours long, and can be done online or by phone. The agency will give you a certificate of completion, which you must file with your bankruptcy petition. The cost is typically $10 to $50.
After you file, you must attend a meeting of creditors, also called the 341 meeting. This is a short hearing where the trustee and any creditors who show up ask you questions about your debts, income, and assets. Most creditors do not attend, especially for credit card debt. Your attorney will prepare you for this meeting and attend with you.
In Chapter 7, if the trustee finds no assets to sell, the case moves toward discharge within a few months. In Chapter 13, the court must confirm your repayment plan before payments begin. This confirmation hearing is another short court appearance, usually handled by your attorney.
How bankruptcy affects your credit and future borrowing
Bankruptcy damages your credit score significantly — most people see a drop of 130 to 200 points when ready. A Chapter 7 bankruptcy stays on your credit report for ten years from the filing date. A Chapter 13 stays for seven years. During that time, lenders will see the bankruptcy and may deny you for credit, or offer credit only at higher interest rates.
However, bankruptcy also stops the damage from unpaid credit cards. If you have been missing payments, those missed payments hurt your score every month. Once you file, those accounts are frozen, and the damage stops accumulating. Over time, as you rebuild credit with on-time payments on other accounts, your score recovers. Many people find their credit score is actually better two or three years after discharge than it was before filing, because the unpaid debts are gone and they have a clean slate.
After bankruptcy, you can rebuild credit by getting a secured credit card, becoming an authorized user on someone else's account, or taking out a credit-builder loan from a credit union. Lenders are often willing to work with people who have filed bankruptcy because the bankruptcy shows you took legal steps to address your debts, rather than straightforward walking away.
Alternatives to bankruptcy for credit card debt
Bankruptcy is not the only option. Debt settlement involves negotiating with credit card companies to pay a lump sum less than what you owe, usually 30 to 60 percent of the balance. This damages your credit but not as severely as bankruptcy, and it happens faster. However, settled debt may be taxable as income, and creditors are not required to settle.
Debt consolidation combines multiple credit card balances into a single loan with a lower interest rate. You still pay the full amount owed, but the monthly payment may be lower. This does not erase debt, but it can make payments manageable if your problem is high interest rates rather than the total amount owed.
Credit counseling through a nonprofit agency can help you create a budget and contact creditors to negotiate lower payments or interest rates. This is free or low-cost and does not damage your credit the way bankruptcy does. However, it requires creditors to cooperate, and it does not stop collection calls or lawsuits.
Frequently Asked Questions
Will bankruptcy erase all my credit card debt?
Chapter 7 erases all unsecured credit card debt if you pass the means test. Chapter 13 erases remaining credit card debt after you complete your repayment plan. However, if you have recently run up credit card debt through fraud or luxury purchases, a court may deny the discharge for those specific charges.
Can I keep my house or car if I file bankruptcy?
Yes, if you are current on your mortgage or car loan and your home or car is protected by your state's exemptions. Chapter 13 is especially useful for keeping assets because you catch up on missed payments through the plan. Chapter 7 may require you to sell assets, but exemptions protect a certain amount of equity in your home and car.
How long does bankruptcy stay on my credit report?
Chapter 7 stays for ten years from the filing date. Chapter 13 stays for seven years. After that time, the bankruptcy is removed from your report, though lenders may still see it in other records. Your credit score typically begins recovering within one to two years after discharge.
What happens to credit card companies if I file bankruptcy?
Credit card companies are notified of your bankruptcy filing and must stop collection efforts when ready. They file a claim with the court to be paid from any assets or repayment plan, but they have no special priority — unsecured debts like credit cards are paid last, after mortgage, car loans, and taxes.
Can I file bankruptcy more than once?
Yes, but there are waiting periods. You must wait eight years between Chapter 7 filings, four years between Chapter 13 filings, and two years if you file Chapter 13 after Chapter 7. These waiting periods exist to prevent people from using bankruptcy repeatedly to erase debt.