A major cause of chapter 7 bankruptcy is excessive credit card debt. Credit cards, because they are unsecured and open-ended, make it easy for people to spend beyond their means. Chapter 7 bankruptcy is looked at as a way to get relief from overwhelming credit card debt and get one’s life back in order.
Understanding credit card debt in relation to bankruptcy proceedings is an important part of understanding whether or not a chapter 7 bankruptcy is right for you. There are three things you need to know in this regard to make the right decision:
- The liquidation principle of chapter 7 bankruptcy
- How non–dischargeable credit card debt is dealt with
- The rights of credit card companies to challenge dischargeable debt.
Chapter 7 Liquidation
Chapter 7 bankruptcy is a liquidation proceeding. It assumes that the consumer does not have sufficient assets to make a restructuring possible, and that there is no likelihood of any future assets being made available. The bankruptcy trustee can seize and sell any non-protected assets the consumer has, with proceeds being distributed to creditors at the court’s discretion.
In every chapter 7 case, there are both dischargeable and non–dischargeable debts. Credit card debt is considered dischargeable because it is unsecured. It is also viewed by the court as low priority debt, meaning credit card companies get pennies on the dollar, if they get anything at all.
In that sense, declaring Chapter 7 bankruptcy is one way to clear yourself of overwhelming credit card debt so that you can get back on track. But there are some exceptions. There are cases in which some credit card debt is non–dischargeable.
Non-Dischargeable Credit Card Debt
U.S. bankruptcy law has been written to take into account the very real possibility of using bankruptcy for fraudulent purposes. Credit cards provide an excellent example of how such fraudulent activity could take place. Imagine a person obtaining several credit cards and charging them to their limits with no intention of ever paying. They later file bankruptcy but keep all of the goods they purchased.
To prevent this from happening, bankruptcy law provides for two exceptions for dischargeable credit card debt. The first relates to what the court identifies as “luxury goods.” For all intents and purposes, luxury goods are considered any goods not necessary for daily maintenance under normal conditions. This would cover just about everything other than food, clothing, gas, medicine, etc. Any credit card debt incurred as a result of purchasing luxury goods within 90 days of declaring bankruptcy is non–dischargeable.
Cash advances are another exception. Any cash advances taken against a credit card within 70 days of bankruptcy cannot be discharged. In both exceptions, the burden of proof lies with the consumer. In other words, in order for luxury goods and cash advance debt to be discharged, the consumer must prove that he or she incurred the debt in good faith rather than in an attempt to commit fraud.
Credit Card Company Rights
Finally, credit card companies can challenge any debts owed to them that a bankruptcy court deems dischargeable. You can go into a bankruptcy proceeding assuming all of your credit card debt will be wiped out only to find out your creditors successfully challenge some or all of it.
Chapter 7 bankruptcy is one way to eliminate credit card debt and regain control of your finances. But there are never any guarantees. Speak with an attorney about your situation in order to determine whether or not bankruptcy is right for you.