Debt is something that most people will experience at some point in their lives. It can be a necessary evil in order to achieve certain goals, such as buying a home or pursuing education. However, when debt becomes unmanageable, it can be overwhelming and lead to financial distress. Credit card debt is one of the most common forms of debt people struggle with, and bankruptcy may be a solution. In this article, we will discuss the basics of bankruptcy for credit card debt, including the different types of bankruptcy, eligibility requirements, and what happens during the process.
Types of Bankruptcy
There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as “liquidation” bankruptcy. This is because in most cases, a debtor’s non-exempt assets are sold in order to pay off their creditors. However, there are exemptions in place which allow debtors to keep certain assets, such as their primary residence, vehicle, and personal belongings.
To be eligible for Chapter 7 bankruptcy, debtors must pass the “means test,” which compares their income to the median income in their state. If their income is below the median, they are generally eligible for Chapter 7 bankruptcy. If their income is above the median, they may still be eligible if they can show that they have little to no disposable income after paying certain necessary expenses.
Once a debtor files for Chapter 7 bankruptcy, an automatic stay goes into effect. This means that creditors must stop all collection actions, including phone calls, emails, and letters. The debtor must attend a meeting of creditors, where they will be questioned about their finances. If there are no objections, the debtor’s non-exempt assets will be sold, and the proceeds will be used to pay off their creditors. Any remaining debt is discharged, meaning the debtor is no longer responsible for it.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is often referred to as the “wage earner’s plan” because it is designed for individuals with a regular income. Unlike Chapter 7, debtors do not have to sell their assets. Instead, they are required to make payments towards their debts over a three to five-year period.
To be eligible for Chapter 13 bankruptcy, debtors must have a regular income and their secured debts must be less than $1,184,200, while their unsecured debts must be less than $394,725. A secured debt is one that is backed by collateral, such as a mortgage or a car loan, while an unsecured debt has no collateral, such as credit card debt or medical bills.
Once a debtor files for Chapter 13 bankruptcy, an automatic stay goes into effect, and creditors must stop collection actions. The debtor must file a repayment plan with the court, which outlines how they will repay their debts over the next three to five years. The plan must be approved by the court, and the debtor must make their payments on time. At the end of the three to five-year period, any remaining debt is discharged, and the debtor is no longer responsible for it.
In addition to the income and debt limits for Chapter 7 and Chapter 13 bankruptcy, there are other eligibility requirements that must be met.
Firstly, debtors must attend credit counseling within 180 days of filing for bankruptcy. This is to ensure that debtors are aware of all their options before filing for bankruptcy.
Secondly, debtors must disclose all their assets, liabilities, income, and expenses. If they fail to disclose any assets or income, they may be denied bankruptcy or have their case dismissed.
Thirdly, debtors must not have filed for bankruptcy recently. If they have filed for bankruptcy within the past eight years, they may not be eligible for Chapter 7 bankruptcy. If they have filed for Chapter 13 bankruptcy within the past six years, they may not be eligible for another Chapter 13 bankruptcy.
Finally, debtors must not have committed any fraudulent or illegal activities, such as intentionally running up their credit card debt before filing for bankruptcy.
What Happens During the Bankruptcy Process?
The bankruptcy process can be complex and stressful, but having a basic understanding of what happens can make it less daunting.
1. Attend Credit Counseling
Before filing for bankruptcy, debtors must attend credit counseling from a government-approved agency within 180 days. This counseling session will provide information about bankruptcy, budgeting, debt management, and other alternatives to bankruptcy.
2. File Bankruptcy Petition
After attending credit counseling, debtors must file a bankruptcy petition with the court. This petition includes documentation of all their debts, assets, income, and expenses.
3. Automatic Stay
Once the bankruptcy petition is filed, an automatic stay goes into effect. This means that creditors must stop all collection actions, including phone calls, emails, and letters.
4. Meeting of Creditors
Debtors must attend a meeting of creditors, also known as a 341 meeting. This meeting is conducted by a trustee appointed by the court and gives creditors the opportunity to ask the debtor about their finances. It is important for debtors to be honest and cooperative during this meeting.
5. Asset Liquidation or Repayment Plan
In Chapter 7 bankruptcy, the trustee will liquidate non-exempt assets and use the proceeds to pay off creditors. In Chapter 13 bankruptcy, the debtor will repay their debts according to the repayment plan filed with the court.
6. Discharge of Debt
At the end of the bankruptcy process, any remaining debt will be discharged. This means that the debtor is no longer responsible for it. However, there are some debts that cannot be discharged, such as certain taxes, student loans, and child support.
1. Will bankruptcy eliminate all my credit card debt?
Bankruptcy can eliminate most credit card debt, but there are some exceptions. Debts that were fraudulently incurred or owed for property obtained by fraud cannot be discharged. Additionally, debts incurred outside of the normal course of business within 90 days of filing for bankruptcy may not be discharged.
2. Will bankruptcy ruin my credit score?
Bankruptcy will have a negative impact on your credit score, but it is not the end of the world. Many people are able to rebuild their credit over time. In fact, some creditors may be more willing to extend credit to someone who has filed for bankruptcy because they know that person’s debts have been discharged.
3. Will I lose my home or car in bankruptcy?
In most cases, debtors are able to keep their primary residence and vehicle in bankruptcy. There are exemptions in place which allow for this. However, if a debtor has significant equity in their home or vehicle, they may be required to sell some of their assets to pay off their creditors.
4. Can I file for bankruptcy if I am unemployed?
Yes, you can file for bankruptcy if you are unemployed. However, you will still need to meet the eligibility requirements, including the income and debt limits for Chapter 7 and Chapter 13 bankruptcy.
Bankruptcy can be a difficult decision to make, but it can offer a fresh start for those struggling with unmanageable debt. Understanding the basics of bankruptcy for credit card debt, including the different types of bankruptcy, eligibility requirements, and what happens during the process, can help debtors navigate this complex process. If you are considering bankruptcy, it is important to speak with a qualified bankruptcy attorney who can guide you through the process and help you make the best decisions for your financial future.
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Bankruptcy is a potential solution for those struggling with unmanageable credit card debt. There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. Chapter 7, or “liquidation” bankruptcy, requires the debtor to sell non-exempt assets to pay off creditors. Chapter 13, or the “wage earner’s plan,” requires debtors to make payments towards their debts over a three to five-year period. To be eligible for either type of bankruptcy, debtors must attend credit counseling, disclose all their assets and income, and not have committed any fraudulent or illegal activities. The bankruptcy process includes attending meetings, either asset liquidation or a repayment plan, and a discharge of remaining debt.