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Can Chapter 7 bankruptcy erase credit card debt?

On Behalf of | Dec 6, 2022 | Bankruptcy

In today’s faltering economy and with rampant inflation, money is tight and many people in the United States are relying on credit cards just to get by day to day.

But credit card debt in the United States is reaching a 20-year record. The New York Fed reports that credit card balances in the United States increased by over 15% compared with the same period last year. The collective credit card debt in the United States is now $930 billion.

Credit cards can compound our financial woes, and eventually we cannot pay even the minimum balances and we default on what we owe. If we are behind on many debts, this is problematic indeed.

Fortunately, we can file for Chapter 7 bankruptcy to help extinguish our credit card debts along other debts. This allows us to move forward with relative financial freedom.

Secured debt vs. unsecured debt

Credit card debt can often be discharged through Chapter 7 bankruptcy because it is usually considered an unsecured debt.

Secured debts are attached to a piece of collateral that can be repossessed or sold if we do not pay the debt. Some examples of a secured debt include an auto loan or a mortgage.

Unsecured debts, like credit card debt, are not attached to a piece of collateral. There is nothing to take back if we do not pay what we owe. With some exceptions for cards that are attached to collateral, we do not even need to give back what we purchased with the credit card.

Chapter 7 and unsecured debts

In a Chapter 7 bankruptcy, our non-exempt assets are sold by a bankruptcy trustee to pay back our creditors in priority order. Once the funds from the sale run out, creditors who have yet to be paid are simply left out, and we no longer need to pay what we owe them.

Chapter 7 bankruptcy is not perfect. A creditor could contest the discharge, meaning we might have to pay the debt after all. The bankruptcy court could determine we fraudulently obtained the credit card at issue. We also cannot have credit card debt erased through bankruptcy if we used it to pay for non-dischargeable debts.

Still, Chapter 7 bankruptcy can be a useful tool to help us out of a deep financial hole created by credit card debt. It offers a brighter picture of what our finances can look like once our overwhelming debt is behind us.