When facing overwhelming financial difficulties, bankruptcy can be a worthwhile last resort for individuals seeking relief. Bankruptcy provides a structured way to address financial struggles, including credit card debt.
It is important to note, however, that bankruptcy addresses credit card different from other forms of debt. You can better plan for the road ahead by knowing what exactly happens to credit card debt during the bankruptcy process.
Types of bankruptcy
There are two primary types of bankruptcy that individuals may file for:
- Chapter 7 Bankruptcy: In Chapter 7 bankruptcy, credit card debt is either secured or unsecred. Unsecured debt is typically discharged, while secured credit card debt may require surrending the collateral associated with it.
- Chapter 13 Bankruptcy: Chapter 13 bankruptcy, also known as “reorganization bankruptcy,” allows individuals with a regular income to create a repayment plan. Credit card debt is part of this plan, and debtors pay a portion of their outstanding balances over a three- to five-year period. After successfully completing the plan, any remaining unsecured credit card debt is often discharged.
Depending on the type under which you file, your credit card debt may undergo a different process.
Upon filing for bankruptcy, an “automatic stay” goes into effect. This prevents creditors from pursuing collection efforts, including any harassment, wage garnishments or legal actions regarding credt card debt. The automatic stay provides debtors with temporary relief and the opportunity to sort out their financial affairs.
Once the bankruptcy process is complete, you will likely face the challenge of rebuilding their credit. It is important to establish responsible financial habits, such as making timely payments on any remaining debts and avoiding new debt. Over time, responsible credit management can help improve your credit score.
The U.S. Courts report that bankruptcy filings totaled 418,724 for the year ending June 2023. While many people turn to bankruptcy as a perfectly valid debt relief solution, it is important that you understand exactly how this process will affect your credit card debt if you choose teh same course of action.