Why Bankruptcy is Not an Option for Credit Card Debt

Many consumers make the mistake of assuming that if they get into too much debt by running up credit card balances, they can use bankruptcy as an escape hatch of last resort. But declaring bankruptcy does not automatically save you from having to pay overdue credit card balances.

Within the past 10 years, the credit card industry lobbied hard for new legislation and won some powerful victories related to bankruptcy law. That was especially true in 2005 – when the latest big changes were instituted. Lawmakers took steps to encourage people to use Chapter 13 bankruptcy – which requires structured debt repayment -rather than Chapter 7 bankruptcy which dissolves debts without repayment.

Those who accept Chapter 13 are guided by a bankruptcy judge who figures out a plan for how much debt should be repaid and how fast, and the bankruptcy repayments are usually completed within 3-5 years. One benefit of Chapter 13 is that it lets the debtor keep personal property, rather than have it sold off to pay their obligations.

Chapter 7 bankruptcy, on the other hand, requires that most of a person's property be auctioned off and that the proceeds go to help pay their outstanding debts. Once that is done, the balances owed to creditors are forgiven. For that reason many people used to use Chapter 7 to shelter them from credit card debt.

So people who did not own much valuable property, for example, would often run up huge credit card balances through cash advances. Then they would declare bankruptcy to avoid having to pay them back – and come out ahead. But under the new laws credit card companies can argue that the money owed to them was obtained fraudulently by consumers who never intended to repay it.

Bankruptcy judges typically agree, and the consumer is left owing their full credit card debt even after undergoing Chapter 7 bankruptcy proceedings. Thanks to declaring bankruptcy their credit is ruined, their personal property has been auctioned off to the highest bidder, and they still owe a mountain of credit card debt.