If you’re overwhelmed with credit card debt, you may consider filing bankruptcy to either get rid of your debt or to restructure your payments so that your debt is easier to repay. Here are some details about bankruptcy to help you decide if it’s the right choice for you.
Two Types of Bankruptcy
There are two types of bankruptcy for consumer credit card debt – Chapter 7 and Chapter 13. Chapter 7 bankruptcy typically allows you to get a discharge of allowable debts – most credit card debt can be discharged, but there are a few exceptions, like debts that were incurred through fraud. To qualify for Chapter 7 bankruptcy, you must pass a means test that shows your current monthly income (as defined in chapter 7 of title 11 of the United States Code) is lower than the median income in your state. Chapter 7 bankruptcy may require you to give up some assets – if you have any. Those assets would be sold and the money used to pay back your debt. There are state and federal laws governing what assets you can keep and which you have to give up.
Chapter 13 bankruptcy is usually for consumers who make too much money to qualify for Chapter 7 bankruptcy or consumers with assets they don’t want taken by the bankruptcy court. Under Chapter 13 bankruptcy, consumers repay some or all their credit card debt through repayment plan that lasts three to five years. Debt repayment is prioritized, but you might not pay any of your credit card debt. Unsecured debt that remains after the repayment period is typically discharged.
Consequences of Bankruptcy
There are some negative side effects of bankruptcy that must be considered before you file bankruptcy. Bankruptcy will stay on your credit report for up to 10 years. If you apply for a credit card soon after your bankruptcy discharge, your application may be denied. Even though bankruptcy typically disappears from your credit report after 10 years, it remains on record with the court forever. Certain credit card, loan, and employment applications will ask if you’ve ever filed bankruptcy.
Some people also experience an emotional side effect of filing bankruptcy. You may feel like you’ve failed at your finances. You may be embarrassed that you filed bankruptcy. Not everyone feels a negative emotion after bankruptcy. Some people are relieved not to face that debt anymore.
Who Should File Bankruptcy?
Before you make the life-altering decision to file bankruptcy, you should explore some other options. You’ll have to talk with a court-approved credit counseling agency within six months before filing bankruptcy, so use that as an opportunity to decide if you could repay your debts through a debt management plan. Other possible options include debt consolidation through a consolidation loan or home equity loan, debt settlement either on your own or through a settlement firm, and changing your lifestyle to give yourself more money to pay your debt.
Before you file bankruptcy, it’s important that you talk to a bankruptcy attorney so you have an idea of your rights. You can file bankruptcy without an attorney, but it’s often easier if you work with an attorney who’s experienced in handling bankruptcy for consumers.