Chapter 7 Bankuptcy and Credit Card Debt
In Chapter 7 bankruptcy, debtors discharge (wipe out) unsecured debts, such as credit card debts. In most cases, your obligation to pay the balance are going to be discharged within four months of filing the Chapter 7 petition. However, there are a number of exceptions, that are usually centered around allegations of fraud.
Most Chapter 7 bankruptcies are “no asset cases.” A no-asset case refers to a case where the debtor has no assets over and above allowed exemptions. Thus, there is no property within the estate that may be liquidated to pay back creditors. In cases where there are assets, the Trustee liquidates property and repays debts based on their priority within the bankruptcy code.
Credit card debts, like most unsecured obligations, are classified as non-priority claims. It is rare for non-priority unsecured creditors to receive any payment in Chapter 7 cases. Any payments that may be distributed are on a pro-rata basis, so every unsecured creditor (including any credit card company) receives an equivalent proportion of its claim – sometimes 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 clean slate with their monetary lives. Most credit card debts are dischargeable through Chapter 7, which means that you will not owe them once you complete the bankruptcy.
However, there are some exceptions to the dischargeability of unsecured debts, including credit card debts. Credit incurred just prior to the filing of the bankruptcy petition or credit obtained by or through fraud or false pretenses are likely to been deemed non dischargeable. Additionally, some debts may be deemed non dischargeable where they were incurred for luxuries.
The bankruptcy code defines “luxury product or services” to exclude “goods or services fairly necessary for the support or maintenance” of you or your dependents. Food, clothing, and fuel, for instance, aren’t normally thought of to be luxury product.
The exceptions to discharge for luxury products and/or services are not absolute. Under bankruptcy law there is a presumption of abuse for where charges are made just prior to the bankruptcy filing. The presumption means the burden is on you to demonstrate that you reasonably believed that you could repay the charged amounts at the time you incurred the debt. This presumption is often difficult to prove and sometimes the filing of a bankruptcy should be delayed to avoid such presumption.
How the Creditor Can Challenge Dischargeability
If a credit card company needs to argue that a debt is non-dischargeable, it should file a complaint with the bankruptcy court. Unless it files such a complaint, even claims for luxury products or services, recently incurred debts and even fraudulently incurred debts may be discharged absent the creditor filing a complaint to determine the debt not to be dischargeable.
In Chapter 7 bankruptcy, the deadline for filing complaints challenging the dischargeability of a debt is 60 days after the first setting of the meeting of creditors.
If a creditor files a complaint for non-dischargeability, you have to file a timely answer if you wish 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 Co-signers on Credit Card Debt
The discharge applies solely to somebody in a bankruptcy case. It does not extend to guarantors or co-signers. If anyone else is accountable for charges that you just created, they will still be liable for the debt, despite your filing Chapter 7 bankruptcy. In other words, your bankruptcy does not discharge someone else’s debt. They too would have to file their own bankruptcy case.