Eliminating Credit Card Debt

Managing credit card debt, particularly if you have debt on multiple credit cards, can be very stressful. As late charges and huge interest rates mount, you may find yourself wondering how you’ll ever pay the balance on your cards. If you can’t keep up with minimum payments, you may face a lawsuit and eventually have your wages garnished. An experienced Los Angeles bankruptcy attorney may be able to help you figure out how to eliminate your credit card debt and reduce your financial stress.

Most credit cards create unsecured debt. This is the type of debt for which a creditor is unable to repossess your property or other items if you fail to pay it. The reason is that such creditors do not hold a security interest in any property as collateral for the money they lend you. In contrast, if you use a “store card” to purchase your goods, then such lenders would be secured by the item(s) you purchase from them, and therefore they would have the right to recover such items in the event you do not pay them.

An example would be if you were to purchase a television from a store like Best Buy using a Best Buy credit card. Here, the lender (Best Buy or its agent, etc.) would have the legal right to recover that television after non-payment. However, let’s assume the same television was to be purchased using a “regular” credit card (Mastercard/Visa, etc). Here, the lender would not be able to recover the television for non-payment of your credit card balance. This would hold true before or after you file for bankruptcy.

Of course, while the law may allow a creditor such as Best Buy the legal right to recover your television for non-payment, as a practical matter, they probably would not do so since it would not make sense from an economical stand point, especially if you have filed for bankruptcy, whether as a Chapter 7  or as a Chapter 13. After all, what is Best Buy going to do with a used television set?

Although you will most likely be able to discharge all of your unsecured debt in a Chapter 7, and most or all of your debt in a Chapter 13 bankruptcy, once the bankruptcy process is completed, both of the above types of debts will have been discharged. However, when it comes to credit cards that create secured debt (such as Best Buy), we have a different outcome. While bankruptcy can still eliminate the debt in that case, it does not necessarily prevent the creditor from repossessing the property.

Personal bankruptcy can be an effective way of dealing with credit card debt that deepens over time while your income remains the same. A Chapter 7 bankruptcy can eliminate credit card debt while a Chapter 13 bankruptcy can either wipe out credit card debt or reorganize it to make it manageable.

Credit Card Debt in Chapter 7 Bankruptcy

A Chapter 7 bankruptcy can eliminate existing credit card debt entirely, as well as eliminate the late fees or interest you may owe on the cards. This holds true even if one or more credit card companies have sued and obtained a judgment against you for the nonpayment, or even if one has garnished your wages.

In many Chapter 7 cases, there are no assets or property in the bankruptcy estate that can be liquidated to raise enough money to pay creditors. However, if there is enough money or equity in assets to pay creditors, they are paid in order of priority. Credit card debts are usually nonpriority claims, and if any payments are made to the nonpriority claims, they are paid on a pro rata basis so each creditor receives the same percentage of its particular claim.

Credit Card Debt in Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is sometimes less effective than Chapter 7 at completely eliminating all your credit card debt. However, you can still eliminate most of the credit card debt by reorganizing your debts and agreeing to pay some percentage of them through the debt repayment plan that you propose to the court. A debt repayment plan must be completed in three years, or under certain circumstances, within 5 years. In order to get approved by the bankruptcy court, your debt repayment plan must be appropriate for your income level and the equity that exists in your property. As such, those with greater income based on their household size will usually pay more than a similar household family with less income. If you are able to complete the plan successfully (meaning you make the payments outlined in the plan), the debt you didn’t pay on the credit cards will be discharged.

Additionally, the automatic stay triggered by Chapter 13 or Chapter 7 bankruptcy stops interest and late fees from accumulating on your credit card. It also stops the harassing phone calls that can sometimes increase the feeling of distress that accompanies financial troubles.

The stress of credit card debt can be overwhelming. An experienced Los Angeles bankruptcy lawyer can advise you on whether Chapter 7 or Chapter 13 bankruptcy would help you get rid of your debt. Contact Devin Sawdayi at 310-475-9399 or via his online form for help with this process.