Credit card debt may be discharged whenever you file for Chapter 7 or 13 bankruptcy. When debt is discharged, your creditors are prohibited from attempting to collect unpaid credit card debt and other debts listed in your bankruptcy; this includes contacting you by phone or by mail. When credit card debt is discharged, those who owe far more than they ever hope to repay may experience both relief and trepidation. Whenever you file for bankruptcy, this negatively impacts your credit report–and your ability to secure new credit or loans–for at least 7 years, but usually 10.
From a legal standpoint, the term "discharge" is more commonly used in the terms "discharge in bankruptcy" or "bankruptcy discharge." This refers to a permanent order issued by a federal bankruptcy judge that forbids credit card companies and other nonexempt creditors from collecting on an existing debt. Discharged debt, on the other hand, refers to one or all of the debt(s) covered by the order, as determined by the court. For a credit card company, a discharge in bankruptcy isn't the best of news. This often means, such as in the case of a Chapter 7 bankruptcy, that the creditor can never hope to collect unsecured debt.
Times of Discharge
The time at which credit card debt and other debt types are discharged depends on the chapter under which a debtor files his case, according to USCourts.gov. When a Chapter 7 or "straight" bankruptcy is filed, typically, the court will grant a discharge promptly, generally around 4 months after the petition is filed. Chapter 13 bankruptcies grants debtors a temporary reprieve from creditor harassment and may also allow them to keep their home or car--property that would have been liquidated under Chapter 7. They must, however, pay back credit card debt and other nonexempt debts within a certain period of time that can range between 3 and 5 years. After this date, debt is considered discharged.
Getting Debt Discharged
The financial advisers at Credit.com state that it's possible for you to "walk out of the courtroom completely debt-free under a Chapter 7." You must, however, first qualify to file for this type of bankruptcy. Under 11 U.S.C., Section 101(10A), a debtor's current monthly income (as defined by the Bankruptcy Code) must be at or less his state's median. Otherwise, the debtor is required to go through a means test to make sure that the debtor isn't using bankruptcy simply as a way to avoid debt that he doesn't wish to pay. This proceeding is typically limited to those with low or modest incomes.
High Wage Earners & Debt
Higher wage earners generally must file for Chapter 13–or not file at all. According to 11 U.S.C., Section 109(e), any individual who is working, even if self-employed or acting as the proprietor of an unincorporated business, can file for Chapter 13 as long as the total of unsecured debts (such as credit card debt) is less than $336,900 and secured debt is less than $1,010,650. Again, the debtor's monthly income is taken into consideration. If it's less than the state median, debtors are given 3 years to repay the debt; however, if the debtor's monthly income is more than the state median, the pay-back plan lasts for 5 years. Much like a consolidation loan, the debtor makes payments to a trustee, who distributes the money to creditors.
Downsides of Discharge
There are a number of disadvantages to filing for bankruptcy to get credit card debt discharged. This legal option to get rid of debt doesn't come free. In February 2010, USCourts.gov states that in addition to a $235 filing fee and a $39 administrative fee, those filing for Chapter 13 must pay attorney's fees. Filing a Chapter 7 bankruptcy costs $245, plus an additional $54 in administrative, attorney and other fees. But the most damning downside of bankruptcy is having credit card debt noted as discharged on your credit history–-as well as the actual bankruptcy itself, which shows up in the public records section of your history. A Chapter 13 stays on your credit report for an additional 7 years after debt is discharged, but no longer than 10 years. Most bankruptcies stay on your record for the entire 10 years, says Credit.com.
More About Bankruptcy
Credit.com points out that although filing for bankruptcy may be necessary, it should be your last resort. Those unfamiliar with the nuances of Bankruptcy Code, such as what is considered exempt debt under Chapters 7 and 13 and what assets they are allowed to keep, should always consult with an attorney to make sure they understand all aspects of bankruptcy.
- U.S. Courts: Bankruptcy Process
- Credit: Is Bankruptcy an Option?
- FTC: Knee Deep in Debt (Bankruptcy)
- Department of Justice. "U.S. Trustee Program." Accessed July 26, 2020.
- United States Courts. "Chapter 7 - Bankruptcy Basics." Accessed July 26, 2020.
- United States Courts. "Chapter 11 - Bankruptcy Basics." Accessed July 26, 2020.
- United States Courts. "Chapter 13 Bankruptcy." Accessed July 26, 2020.
- United States Courts. "Chapter 9 - Bankruptcy Basics." Accessed July 26, 2020.
- United States Code. "Chapter 11 — Reorganization — Historical and Revision Notes." Accessed July 26, 2020.
- United States Courts. "Chapter 12 - Bankruptcy Basics." Accessed July 26, 2020.
- United States Courts. "Chapter 15 - Bankruptcy Basics." Accessed July 26, 2020.
- United States Courts. "Discharge in Bankruptcy - Bankruptcy Basics." Accessed July 26, 2020.
- Consumer Financial Protection Bureau. "I Filed for Bankruptcy. How Long Will That Appear on Credit Reports?" Accessed July 26, 2020.
Lisa Sefcik has been writing professionally since 1987. Her subject matter includes pet care, travel, consumer reviews, classical music and entertainment. She's worked as a policy analyst, news reporter and freelance writer/columnist for Cox Publications and numerous national print publications. Sefcik holds a paralegal certification as well as degrees in journalism and piano performance from the University of Texas at Austin.