Credit card companies charge outrageous interest rates. And for those with significant credit card debt, it may be impossible to make more than the minimum payment. For those struggling, there’s good news.
You May Be Able to Discharge Some, Or All of Your Credit Card Debt.
In a chapter 7, an individual seeks to have all debts discharged (with a few exceptions). In what’s called a chapter 13, an individual seeks to pay back some portion of his or her creditors, usually over 36 or 60 months. In both instances credit card debt is usually classified as the lowest priority of debts. If you qualify to discharge some or all of your debts (a qualified bankruptcy can advise you on this), then credit card debt is usually the first to go. There are only limited exceptions to this rule.
Exceptions to Discharge of Credit Card Debt:
- Paying Off Non-Dischargeable Debts Using Credit Cards. If credit cards are used to pay off otherwise non-dischargeable (i.e. debt that cannot be wiped out), then that credit card debt is similarly non-dischargeable. There are two instances where this is most likely to become an issue:
- Using credit card advances to pay off student loans. Student loans are generally non-dischargeable. Some borrowers try to get around the rule by paying off student loans with credit cards, believing that they can essentially convert the non-dischargeable debt into debt that can be wiped out. Bankruptcy law prohibits this.
- Used credit card cash advance to pay off taxes. Certain types of tax debt are non-dischargeable (the rules governing those instances are the subject for another conversation). If a debtor similarly attempts to pay off current tax debt by using creditors, those specific credit card debts can themselves become non-dischargeable.
- Big Charges or Cash Advances Shortly Before Filing. If a debtor takes out cash advances exceeding $925 on a credit card within 70 days before filing, such charges is likely non-dischargeable. Similarly, charges for luxury items, if the total exceeds $625 in the 90 days prior to filing, the court will view these charges as “presumptively fraudulent.” This means the court presumes that you did not intend to repay these debts, and thus deems them non-dischargeable. A debtor may prove otherwise, by showing that:
- Any luxury items were not actually luxury items. To this end, it is important to note that the classification as a luxury item can be based either on the nature of the item (such as a luxury vacation, or can be classified because the nature or size of the purchase (e.g. buying a 3-year supply of an ordinary type of item);
- Another defense to the presumption of fraud would be evidence of an actual intent to repay.
In any of the described instances, it is important to note that 1) the credit card provider is going to need to commence an actual lawsuit in your bankruptcy case in order to seek denial of discharge, and 2) if such a suit is filed against you, you’ll need to pay to hire a bankruptcy attorney to defend against the claim.