How Does Chapter 13 Bankruptcy Erase Credit Card Debt?

People with a steady income or substantial assets sometimes use Chapter 13 bankruptcy to help them avoid foreclosure, repossession, and wage garnishments while they repay their debts. Through Chapter 13, they consolidate debts into a single repayment plan managed by a bankruptcy court. Many types of debt can be included in this repayment plan including past-due balances on credit card accounts. Speaking with a lawyer for a free consultation is your first step to a fresh start!

Chapter 13 Bankruptcy and Credit Card Debt

By keeping creditor action at bay through a temporary stay and preventing interest and late fees from accruing on credit card balances, Chapter 13 provides people with extra time to repay their credit card debt. A Chapter 13 repayment plan features a lower monthly payment than those the individual was previously making. In addition, the payment is free of interest charges, allowing debtors to temporarily disregard high credit card interest rates.

Since Chapter 13 is a debt reorganization (vs. elimination) bankruptcy, it requires some debts to be repaid. While some debts are repaid in full through the three to five-year repayment plan, others are partially repaid and some are not paid at all. Several factors determine how much credit card debt must be repaid and the remaining balance will be wiped out when the bankruptcy is discharged.

Debts from unsecured credit cards are classified as general unsecured debts, which have the lowest priority for repayment. However, some credit card debts are secured by assets and these are classified as secured debts, making repayment likely. When filing for Chapter 13, the debtor proposes a repayment amount for each type of debt. To retain property that secures a debt, the debt must be repaid in full.

Once all secured and priority unsecured debts are repaid, any remaining funds are distributed to credit card companies, with each company receiving a percentage of what it is owed based on what the debtor can afford to repay. Chapter 13 filers are not usually required to fully repay unsecured debts from credit cards. Though some filers may already be in credit card default, a portion of their remaining balances is usually discharged.

People who are saddled with credit card debt that they can partially repay if they are given enough time should explore Chapter 13 bankruptcy. A bankruptcy attorney will determine whether they qualify and if they do, will help them gather, complete, and submit the required documents. If Chapter 13 is not an option, there may be alternative ways to reduce or eliminate this debt. Speaking with a lawyer for a free and confidential consultation will get you started!