Discharging Credit Card Debt in Chapter 7 Bankruptcy

By | February 25, 2012

Are you struggling with credit card debt? You are not alone. Millions of Americans carry balances on high-interest credit cards and once you start charging it can be very difficult to ever pay off the balance on these cards. Even low-interest credit cards are an expensive way to borrow money, with rates usually in the 11 to 17 percent range. If you pay a payment late the interest rate can quickly jump to 30 percent, making repayment impossible.

For example, consider John, a married man with two kids. John earns $50,000 a year and has three credit cards earning 11% interest with balances totaling $10,000.00. Based upon his interest rate and balance he is paying approximately $1,100.00 a year in interest, assuming he is making his payments on time, preventing the interest from compounding and late fees from being charged. John is late making a payment on one of those credit cards and a month later all three creditors increase his interest rate to 30% interest. Now he is paying $3,000.00 a year in interest. Many creditors calculate the minimum payment due each month as the interest accrued plus 1% of the balance. That means that John is paying $350.00 a month or $4,200.00 a year in minimum payments. That is approximately 10% of his net income each year! With all of the expenses associated with a family of four, it is unlikely that John will be able to pay more than the minimum payment and as a result it will take him 30 years to pay off his credit card debt. Luckily, John is a perfect candidate for Chapter 7 bankruptcy.

Chapter 7 bankruptcy allows debtors to discharge most of their unsecured debt in three to four months, usually with no payments to creditors. Credit cards are unsecured debt so once the bankruptcy is completed the debtor is no longer liable for these types of debts. They are discharged, meaning the creditors cannot pursue collection of these types of debts from the debtor.

Understandably most people are hesitant about filing bankruptcy. We all like to think of ourselves as responsible adults and we have been taught that being responsible means paying our debts. However, sometimes life doesn’t cooperate. People get sick, laid off from their job, have unexpected expenses or some other type of financial disaster happens, and debt quickly gets out of control. When this happens there are usually two choices. You can struggle with your debt for years and sometimes decades, or you can admit that you can’t repay the debt, talk to a bankruptcy attorney, file your case, and get a fresh start.