There is a lot of misconception about what is and what is not discharged during a Chapter 7 bankruptcy. Many consumers are misinformed in thinking that a declaration of bankruptcy is like a magical wand that eliminates all of their debt. While filing for Chapter 7 bankruptcy will wipe out a significant portion of your accumulated debt, not all debt is eligible to be dismissed.
Eligible Chapter 7 Bankruptcy Debt:
- Credit Card Debt – Most, if not all, of your credit card debt will be eliminated. The exception would be luxury purchases that have been made within the last 90 days or any cash advances incurred in the last 70 days. You may run the risk of exposing yourself to fraud charges if you are found to have made these types of purchases within that timeframe.
- Lawsuits – If you have any lawsuit judgments against you, they will be dismissed through the bankruptcy declaration.
- Unpaid Medical Bills – This is another debt that often causes the need for bankruptcy. For those without health insurance or who have limited insurance plans medical bills can be rather significant, but these costs will be discharged through the bankruptcy.
- Sole Proprietor Unsecured Business Debt – Debts owed to other professionals and suppliers associated with your business will be discharged. However, large orders and/or services procured within a 90-day timeframe will be scrutinized. (For instance, you cannot stock up on several months of supplies resulting an order out of the ordinary, and then turn around and file for bankruptcy.)
- Sole Proprietor Leases and Contracts – Any equipment or land rental, lease, or purchase agreements you have made through a business can be dismissed in the bankruptcy.
- Unsecured Loans – Any loan that does not have the guarantee of property or tangible assets is eligible.
The debts mentioned above cover a significant range of unsecured of debt, but there are certain items that are not included in the eligibility of filing for Chapter 7 bankruptcy.
Ineligible Chapter 7 Bankruptcy Debt:
- Student Loans – All student loans are expected to be paid. However, there is an exception for hardship. A qualified bankruptcy attorney will be able to help you determine whether or not your student loan falls into this category.
- Tax Debt – Trust fund taxes and back taxes will not be included in the bankruptcy filing and discharge.
- Luxury Purchase and Cash Advances – Any purchase or cash advance within the designated 90-day timeframe that is deemed to be a “luxury” or unnecessary will be subject to payment with possible fraud charges.
- Pension Loans – This would include loans against your 401k.
- Family Court Imposed Debt – These debts include child support and alimony payments.
- Personal Injury Debt and Court Penalties – Any debt directly related to court-imposed restitution, penalties, and/or fines directly related to harm caused to another (such as restitution for a DUI case) would not be eligible under Chapter 7 bankruptcy.
What Credit Card Purchases Do I Lose If I File for Bankruptcy?
If you know that you are about to file for bankruptcy, using a credit card for luxury purchases can be very dangerous. Any credit card-related debt could be deemed fraudulent and the debtor may be required to pay off the amount in full, as it will not be included in the bankruptcy discharge. As a general rule, you should not have any luxury purchases within 90 days of filing for bankruptcy.
What Qualifies as a Luxury Purchase?
Luxury items are things not deemed necessary for your everyday life. Vacation packages, TVs, computers, salon treatments, expensive clothing, etc. are all items that will raise a red flag. All charges over $600 will likely be looked at for fraud. For instance, if you already know that you are about to file for bankruptcy but have one credit card that is not yet maxed out to make frivolous purchases, your filing could be compromised. If you use the credit card to book a $2,000 trip to a tropical location, buy a new wardrobe, and treat your girlfriend to a day at the spa — these charges will be scrutinized and the debt collectors will file to have these purchases considered non-dischargeable charges, as well as file fraud charges against you.
What Can I Charge if I Know I Am Filing for Bankruptcy?
You still have a wide scope of charges you can make during this time that would be discharged by the courts. It would not be suspicious if you were to charge weekly groceries on the credit card if you are seriously cash-strapped. Another exception would be a potential home or auto emergency, such as a car repair that was needed to make the car operational or a repairing roof damage caused by a storm that made the home unsafe.
What Can Happen To Me If I Have “Luxury” Charges before Bankruptcy?
The credit card company will first have to prove that your charges were, in fact, luxury charges. Then, it will need to be determined if your fraud was actual fraud or constructive fraud. Actual fraud is a blatant act of running up the charge card with the intent of not paying. Constructive fraud is when the debtor does not actually have intent to fraud, but the actions may be deemed fraudulent. It will be up to you to prove that these purchases were not fraudulent and were necessary to your everyday life.
It is very easy to get confused with what is and what is not considered fraud. If bankruptcy is imminent, it is time for you to contact a bankruptcy lawyer to go over all of your available options and to help guide you through the process. The lawyer will then be able to tell you what is and what is not considered fraud, as well as helping you file all of the necessary legal documents to file for bankruptcy.
Do I Lose All My Credit Cards if I File for Bankruptcy?
These days, it seems that not having a credit card is almost criminal. Most people prefer to carry plastic than have any cash on hand. With credit card providers offering cash-back incentives and the necessity of having a credit card to book most travel accommodations and make Internet purchases, it is understandable why cash seems to have gone by the wayside. But, if you are in danger of credit card bankruptcy, will you find yourself on the outside looking in with no credit cards available to use?
The average person in America owes about $5,000 in credit card debt. This number escalates dramatically when it is focused on small business owners whose balance can be as much as $10,000-$25,000. In many cases, credit card usage begins at the student level — between 2011 and 2012, students averaged over $750 in credit card debt.
One way to lower your credit card balances is to simply stop using the cards, pay them off, and then cancel them. How can you do this? To start, if you have fairly good credit, look for cards that offer longer no interest periods on new accounts.
Instead of paying the regular interest rate of 15.99 to 23.99-percent, open a new account on a card that charges zero interest for 18-months, transfer the balance to the new card, and then cancel the old card once the payment has been received. You will likely be charged between 1 to 3-percent to make the transfer but afterwards, you will have 18 months of every penny of every payment going towards the principle. The one lump transfer fee is often lower than the total monthly interest of the old card.
If your credit is not in good standing and opening up new credit card accounts that have favorable balances is not an option, you may want to consider credit card bankruptcy. Filing for Chapter 7 bankruptcy will provide you with much needed financial relief from your current the massive credit card debt load. In order to qualify, you will have to pass a “means test,” and some of the assets you currently own may have to be sold to pay off the debt. Fortunately, there are limits set by the government as to how much of these goods must be forfeited for this purpose.
If holding onto some of your credit cards is necessary, you should ask your attorney to discuss a Chapter 13 bankruptcy. This bankruptcy filing option requires payments to be made on debt for three to five years. In many cases, the individual is able to keep some or all of his or her property and credit cards.
Choosing Between Bankruptcy & Debt Consolidation
If you are overwhelmed with debt, you may think that bankruptcy is your only option. However, in some cases, debt consolidation allows the consumer to reorganize his or her budget and pay off debts without having a bankruptcy on his or her credit report. We have put together a list of the pros and cons of both to help make the right decision for your situation.
Filing For Chapter 7 Or Chapter 13 Bankruptcy
Personal bankruptcy is generally considered the last resort for managing debt because the results are long-lasting on your credit report and history (up to 10 years). Study the pros and cons carefully before making a decision. Then, if you decide bankruptcy is the way to go, it’s important to do it right.
Consider the pros and cons of filing for bankruptcy below:
- Creditor Protection – Once bankruptcy paperwork is filed, your creditors must leave you alone or risk penalty under an “automatic stay.” When they are made aware of the filing, they can no longer harass you for payment.
- Completely Debt Eliminated – Except for student loans, your debt will be eliminated. This allows you to start fresh and hopefully avoid this problem again in the future.
- Reasonable Exemptions – Most states allow you to exempt your home, car and other daily essentials, so you will not wind up homeless and unable to get around.
- Last Resort – If you’re unable to pay your bills, debt is growing, you have no savings, and money management plans were unsuccessful, then filing bankruptcy can be sweet relief.
- Credit Rating – Your credit rating will take a significant hit. Bad debt may be on your report for up to seven years, while a bankruptcy will not come off for ten.
- Lack of Privacy – In some cases, structured payments are required. These payments generally come through payroll deductions. Your employer will be aware of your financial problems and it may affect how they think of you at work, especially in regard to financial positions and responsibility.
- Lack of Credit – After a bankruptcy is finalized, it will be very difficult to find any reasonable credit terms. In a few months, your mailbox may be filled with offers, but the cards will generally require fees and outrageous credit terms.
Debt consolidation is the process of combining multiple debts at the lowest possible interest rate. Instead of paying several different accounts every month, through this option, you only have to worry about one payment. Because the interest is lower, your debt doesn’t grow as fast and more of each payment you make goes to paying off the principal (original debt owed) versus towards the interest accrued every month.
Consider the pros and cons of pursuing debt consolidation below:
- Maintain Credit – If you are consolidating, you are not forced to give up any of your credit cards.
- Simplify Finances – Instead of 10 different payments to 10 different lenders, you’d only make one or two payments a month.
- Better Terms – Consolidation loans usually offer much friendlier terms than credit card companies. You pay less with more of the money going against principal to pay off the debt quicker.
- Risk Property Loss – Many people use their homes as collateral for debt consolidation loans. If they still fail to make payments, the house or property is at risk to the lender.
- Hidden Fees – Watch the fine print. What often seems like a great deal from consolidation loans can be a wolf in sheep’s clothing.
- IRS Penalties – Some debt settlement is actually considered income by the IRS. If this is the case and you fail to report it, you may end up with severe tax penalties.
If you are still confused which is better for you, it may be time to consult with an experienced bankruptcy attorney to explore all of your options as well as having the benefits and consequences of each fully explained. Our team of bankruptcy experts is here to offer you a free consultation to go over your financial concerns and to find out how we can help you get started on the road to recovery — in either trying consolidation as your next debt management plan or by helping you file for bankruptcy.