These are unprecedented times. The pandemic and attendant government shutdowns and slowdowns have hit the economy hard, and many of us are unemployed or underemployed. Those without emergency savings have undoubtedly relied on their credit cards to make ends meet, but that lifestyle is unsustainable in the long run.
What is the next step? You may have heard that burdensome credit card debt is a common reason that people file for bankruptcy, and this is true. In fact, credit card debt is among the top three reasons people file bankruptcy, along with sudden job loss and medical bills.
For the honest but unfortunate debtor who unwittingly finds themselves in credit card debt they cannot hope to repay, bankruptcy can be the answer. Read on to find out how Chapter 7 bankruptcy might help you, from the office of a prominent Chapter 7 bankruptcy attorney.
What is Chapter 7 Bankruptcy?
A “Chapter 7” filing is filed under Chapter 7 of the federal Bankruptcy Code. Chapter 7 is a four- to six-month liquidation process during which a debtor discloses all income, expenses, assets, and debts, and the court grants a discharge of all eligible unsecured debts.
How Does Chapter 7 Bankruptcy Work?
These are the steps in a typical Chapter 7 bankruptcy case:
- Prepare Chapter 7 petition and schedules;
- Prepare a complete list of creditors;
- Complete and pass the Chapter 7 means test (test of income eligibility)
- Complete the online Credit Counseling Course;
- File these documents with the court along with the Chapter 7 filing fee;
- Attend the 341(a) meeting of creditors
- Provide the Chapter 7 Trustee with any information or documentation required;
- Wait for the deadline for creditors to object to discharge to pass;
- Receive a discharge order;
- The case closes.
What Happens to Credit Cards in Chapter 7 Bankruptcy?
Credit card debt, along with medical debt and personal loans, is considered general unsecured debt that can be “discharged” in bankruptcy. When a debt is “discharged,” the debtor is no longer personally responsible for paying it back, and a creditor cannot attempt to collect it.
By way of contrast, there is also secured debt, which is secured by underlying collateral such as a car or a home. That debt can be discharged in a Chapter 7 filing if the debtor surrenders the collateral to the creditor.
The last type of debt is priority unsecured debt. This is debt that cannot, as a matter of public policy, be discharged in bankruptcy. These debts include, among others:
- Child support
- Spousal support or alimony
- Government fines or fees
- Sales taxes
- Some income taxes
- Criminal fines and fees
What Other Debt can be Discharged in Chapter 7 Bankruptcy?
- Medical debt
- Car loan or lease, if the car is surrendered
- Mortgage, if the home is surrendered
- Private loans from family or friends
- Personal loans
- Past due bills for utilities or cell phones
- Unpaid rent
Special Considerations in Chapter 7 Bankruptcy
Student loans are considered nonpriority unsecured debt, however, they are not dischargeable in Chapter 7 bankruptcy. Under rare circumstances, they are dischargeable in Chapter 13 bankruptcy. The good news is, if a debtor is discharged from credit card debt, medical bills, past due bills, and the like, that may make paying student loans more affordable.
One unintended consequence of filing for bankruptcy is that the bankruptcy will affect anyone for whom you have cosigned a loan. This might be a car loan or lease, or a mortgage, or a joint credit card. This cosigned debt must be included in your bankruptcy filing and you will be discharged of your obligation to repay it.
Chances are good that the discharge of your obligation is a default under the terms of the loan, and the person you co-signed the loan for will have to deal with the repercussions from that. Such repercussions may include repossession, foreclosure, or a collection lawsuit. In a best-case scenario, your consignor will be able to renegotiate or refinance the loan.
Common Pitfalls in Chapter 7 Bankruptcy
Failing to fully disclose financial information or attempting to hide assets
These are federal crimes. Not only can the Trustee object to discharge and move to dismiss your case for fraud, but you can be charged with a felony. The FBI will investigate, and the Department of Justice will prosecute.
If you are convicted, you can serve up to five years in prison and pay a fine of up to $250,000.
Failing to include all creditors or debts
If you do not include a creditor or pre-petition debt in your filing, that creditor will not receive notice of the filing. If the creditor persists in collection efforts in violation of the automatic stay, that creditor has a defense.
While most courts have held that an unlisted pre-petition debt is also discharged, this is by no means a sure thing. Be sure to list all creditors and debts in your initial filing.
Misclassifying a debt as unsecured
“White label” credit cards are cards that seem to be issued by a specific retail establishment, such as a jewelry store, appliance store, or big box home improvement store, but are actually backed by a large bank.
White label credit cards often include terms providing for a security interest in the goods purchased in the contract’s small print. This means that whatever you purchase and charge to the card, the lender has a secured interest in that purchase.
In cases where the purchase occurred just before filing or the collateral is high-value, an attorney for the lender can appear at the 341(a) meeting and ask you questions under oath. That lender can then object to discharge of that particular debt or of discharge in general if your behavior in charging purchases “in contemplation of bankruptcy” was especially egregious. In either case, you will have to negotiate with the lender and perhaps return the collateral.
Failing to follow all procedural requirements
Whether you file bankruptcy with the help of an attorney or on your own, representing yourself “pro se,” you are required to follow all of the procedural requirements of the bankruptcy court. These are common and unfortunate causes of a deserving debtor’s case being dismissed:
- Failure to pay filing fee;
- Failure to file all required schedules;
- Failure to take the credit counseling course;
- Failure to file the certification of completion of the crest counseling course;
- Failure to appear at the 341(a) meeting of creditors;
- Failure to supply the Chapter 7 Trustee with requested documentation or information;
- Failure to take the financial management course;
- Failure to file the certification of completion of the financial management course.
If you make all disclosures and follow all procedural requirements in your Chapter 7 filing, you should have no problem receiving a discharge of your credit card debt and getting a fresh financial start. Good luck!