In Chapter 7 bankruptcy, debtors are usually able to discharge (wipe out) credit card debts. Generally, credit card debts are treated like other unsecured claims in Chapter 7 cases. The Chapter 7 trustee may pay some of your credit card debt, along with other unsecured claims, in the unlikely event that your bankruptcy estate has enough money. In most cases, your obligation to pay the balance will be discharged upon successful completion of the case. However, there are a few exceptions in the case of fraud.
When the Trustee Pays Credit Card Creditors From the Bankruptcy Estate
Credit card companies are included among your creditors when you file bankruptcy under Chapter 7. Most Chapter 7 bankruptcies are “no asset cases.” In a no-asset case, there is no property in the estate that can be liquidated to raise money to pay creditors. In cases where there are assets, any money that can be raised is paid to creditors in order of priority.
Credit card debts, like most other unsecured obligations, are considered to be nonpriority claims. It is relatively rare for nonpriority creditors to receive any payment in Chapter 7 cases. Any payments that can be made are distributed on a pro rata basis, so that each unsecured creditor (including any credit card company) receives the same percentage of its claim – usually, nothing, or at most, pennies on the dollar.
Exceptions to the Dischargeability of Credit Card Debts
Many people file for Chapter 7 bankruptcy in order to discharge debts and get a fresh start with their financial lives. Most credit card debts are dischargeable through Chapter 7, which means you will not owe them once you complete the bankruptpcy.
However, there are some exceptions to the dischargeability of credit card debts. Credit card charges incurred through actual fraud, a false misrepresentation, or false pretenses are considered to be nondischargeable. There are two circumstances when credit card charges are presumed to have been incurred through fraud:
Luxury goods. If you use a single credit card to buy more than $650 worth of luxury goods or services within 90 days of filing for bankruptcy, the debt is presumed to be nondischargeable. Bankruptcy law defines “luxury goods or services” to exclude “goods or services reasonably necessary for the support or maintenance” of you or your dependents. Food, clothing, and gasoline, for example, are not ordinarily considered to be luxury goods.
Cash advances. If you use a credit card to take over $925 in cash advances within 70 days of filing bankruptcy, the debt is presumed to be nondischargeable, whether you use the advance for luxury goods or anything else.
The exceptions to discharge for luxury goods and cash advances are not absolute. Under bankruptcy law, it is presumed that any charges for luxury goods and cash advances, within the specified limits, were made through false pretenses, a false misrepresentation, or actual fraud. The presumption means that the burden is on you to demonstrate that you intended to and reasonably believed that you could repay the charge when you incurred it. This is very difficult to do.
How the Creditor Can Challenge Dischargeability
If a credit card company wants to argue that a debt is nondischargeable, it must file a complaint with the bankruptcy court. Unless it files such a complaint, even claims for luxury goods and cash advances are discharged along with other obligations against you.
In Chapter 7 bankruptcy, the deadline for filing complaints challenging the dischargeability of a credit card debt is 60 days after the first meeting of creditors.
If a creditor files a complaint for nondischargeability, you must file a timely answer if you want to dispute the creditor’s claim. If you file an answer, the bankruptcy court will hold a hearing before deciding whether or not your debt is dischargeable.
Guarantors and Cosigners on Credit Card Debt
The discharge applies only to the debtor in a bankruptcy case. It does not extend to guarantors or cosignors. If anyone else is liable for charges that you made on a credit card, they will still be liable after you file Chapter 7 bankruptcy, regardless of whether the claim is dischargeable against you.