Getting Out from Under Credit Card Debt: Bankruptcy 101

Getting out from under your credit card debt can seem like an overwhelming and insurmountable problem. You have probably considered and rejected the idea of filing for bankruptcy more than once as you deal with collections phone calls, dunning notices and mounting stress. Take a few minutes to give yourself a basic understanding of how bankruptcy might help you wipe out your credit card debt.

Bankruptcy 101

The two most popular types of personal bankruptcy that are filed in the US are Chapter 7 and Chapter 13. In 2005 Congress changed bankruptcy laws making Chapter 13 the more attractive type of bankruptcy for most Americans. Before explaining the differences between Chapter 7 and Chapter 13, here are few bankruptcy terms you will need to know:

Debtor - person who owes money to another person or organization
Creditor - the entity that is owed money by a debtor
Asset - anything you own that has value
Bankruptcy - a legal "announcement" that you are insolvent and unable to pay your current debts
Trustee - the person is appointed by the bankruptcy court to supervise your bankruptcy case
Liquidation - a sale that converts goods or assets to cash
Exemption - property or assets that the trustee cannot sell (liquidate) to raise money to pay your creditors; these vary by local state law

Another common term you will see is "discharge". This means the forgiveness of the debt. Not all debts can be discharged in a bankruptcy. If you owe child support, fines to a court for something like DUI, back taxes and some types of student loans you can expect those to survive the bankruptcy and continue to be obligations you have to pay.

Chapter 7

Chapter 7 bankruptcy is often called the liquidation bankruptcy because your assets can be liquidated by the Trustee to raise money to pay your creditors. There are a few exemptions, such as the car you use to get to work, household goods and some home equity but these vary widely by state as far as the types of items which are exempt and their value.

Chapter 7 may be the right choice for you to get out from under your credit card debt, if your overall debt is predominantly unsecured debt, which means any debt that does not involve a lien on your property. Credit card debt, medical debt, and personal loans fall into this category. People who also have assets they want to protect and keep should consider Chapter 13.

Chapter 13

Chapter 13 bankruptcy is a debt reorganization. Together with your attorney and the Trustee, you will work out a repayment plan that usually takes 3-5 years and will be court supervised. Often people can keep their homes and cars under Chapter 13.

Credit Card Debt

A word of caution. Credit card debt is not automatically included in a bankruptcy. Your creditors may object to including what you owe them in your bankruptcy by filing something called an "adversary proceeding". They may try to claim that you:

applied for the card fraudulently, knowing you would not be able to repay
ran the card up to or over its limit right before filing bankruptcy
used it for frivolous purchases like luxury items or a vacation shortly before filing

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