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Credit Card Debt in Chapter 7 and Chapter 13 Bankruptcy

Credit card debt can be incredibly stressful for people experiencing financial difficulties. High interest rates and late fees, along with increasingly high minimum payments, may make final payment of the debt seem impossible. The bankruptcy system may allow the discharge of some or all of a person’s credit card debt. It prevents discharge, however, of debt(s) incurred fraudulently or in bad faith, such as if a person charges a large amount to a credit card shortly before a planned bankruptcy filing.

Unsecured vs. Secured Debt

Most credit card debt is unsecured, meaning that the creditor does not have the right to repossess property, known as collateral, if the debtor defaults. In the case of a credit card issued by a retail store, the store may have the legal right to repossess whatever items the debtor purchased, although it is not always financially feasible to do so. Secured debt, such as a mortgage or car loan, generally receives higher priority for repayment from the bankruptcy estate than unsecured debt.

Bankruptcy Schedule F

Certain unsecured debts, such as child support or tax debt, are treated as “priority claims,” while the rest are “nonpriority claims.” A debtor filing for personal bankruptcy under Chapter 7 or Chapter 13 must complete Schedule F, which identifies creditors who have “unsecured nonpriority claims.” Most forms of credit card debt go on this schedule.

Nondischargeable Credit Card Debt

Debt incurred through fraud is not dischargeable through bankruptcy. With regard to credit card debt, bankruptcy law presumes fraud in two situations. The first occurs if a debtor charges more than $650 for “luxury goods” during the ninety-day period prior to filing a bankruptcy petition, and the second occurs if a debtor obtains more than $925 in cash advances from one or more credit cards during a seventy-day period before filing. “Luxury goods” are defined as goods or services that are not “reasonably necessary” for a debtor’s living expenses and support of dependents.

The credit card company must affirmatively challenge the discharge of credit card debt, while a bankruptcy case is pending, by demonstrating to the court that a presumption of fraud applies to the debtor. The debtor may dispute the creditor’s claims, and is entitled to a hearing to offer evidence that the debt was not incurred fraudulently.

Credit Card Debt in Chapter 7 and Chapter 13 Bankruptcy

Chapter 13 and most personal Chapter 7 cases deal with credit card debt in similar ways. If a debtor has enough nonexempt property to sell in a Chapter 7 case, the trustee may use some of the proceeds to pay credit cards after any secured and other priority claims. In a Chapter 13 case, the restructured debt payment plan will focus on secured and priority claims. In either type of case nonpriority unsecured claims receive pro rata shares of whatever, if anything, is left.

The bankruptcy system offers relief to people who cannot make their required debt payments from their available income. With a bankruptcy filing, a debtor may be able to liquidate assets in order to pay down debts, create a more manageable bill payment schedule, and possibly discharge some or all of his/her debts entirely. Since 1997, personal bankruptcy attorney Devin Sawdayi has guided clients in the Los Angeles area through the bankruptcy process. To schedule a free and confidential consultation to discuss your case, contact us today online or at (310) 475-9399.

More Blog Posts:

Credit Card Debt May be Dischargeable in a Chapter 7 Bankruptcy, but a Court Order for Payment of Credit Card Debt to a Former Spouse is Not, Los Angeles Bankruptcy Lawyer Blog, November 1, 2013

How Are Payday Loans and Cash Advances Treated in Bankruptcy? Los Angeles Bankruptcy Lawyer Blog, October 16, 2013

Understanding the Chapter 7 “Means Test,” Los Angeles Bankruptcy Lawyer Blog, October 4, 2013