Credit Card Debt in Bankruptcy and How to Live Without Them
The main reason most people file for Chapter 7 bankruptcy is to wipe out credit card debt. In most situations, your obligation to pay the balance will go away at the end of your case.
When the Trustee Pays Credit Card Creditors From the Bankruptcy Estate
Most Chapter 7 bankruptcies are “no-asset cases.” There’s no property to sell for the benefit of the creditors. In the rare asset case, creditors will receive money according to a priority ranking system. Credit card debts, which are nonpriority claims, fall at the bottom of the list. So it’s unusual for a credit card company to receive any payment.
Exceptions to the Dischargeability of Credit Card Debt
Although filing bankruptcy usually discharges credit card debt, it doesn’t always work that way. A balance incurred through actual fraud, a false misrepresentation, or false pretenses, will remain. It’s “nondischargeable,” so you’ll have to pay it after bankruptcy.
Credit card purchases are presumed fraudulent in two circumstances.
Luxury goods. If you use a single credit card to buy more than $675 worth of luxury goods or services within 90 days of filing for bankruptcy, the debt is considered nondischargeable. Bankruptcy law defines “luxury goods or services” to exclude “goods or services reasonably necessary for the support or maintenance” of you or your dependents. Food, clothing, and gasoline, for example, are not usually considered luxury goods.
Cash advances. If you use a credit card to take more than $950 in cash advances within 70 days of filing bankruptcy, the debt is considered nondischargeable, regardless of how you use the money.
The exceptions to discharge for luxury goods and cash advances are not absolute. Under bankruptcy law, it is presumed that any charges for luxury goods and cash advances, within the specified limits, were made through false pretenses, a false misrepresentation, or actual fraud. This means that the burden is on you to prove that you intended to and reasonably believed that you could repay the charge when you incurred it, which is difficult to do.
How the Creditor Challenges Dischargeability
If a credit card company argues that a debt is nondischargeable, it must file a complaint with the bankruptcy court. Unless it files such a complaint, even claims for luxury goods and cash advances are discharged along with other obligations against you.
In Chapter 7 bankruptcy, the deadline for filing complaints challenging the dischargeability of a credit card debt is 60 days after the first meeting of creditors. If a creditor files a nondischargeability complaint, you must file a timely answer to dispute the creditor’s claim. Then the bankruptcy court will hold a hearing to decide whether your debt is dischargeable.
Guarantors and Cosigners on Credit Card Debt
The discharge applies only to the debtor in a bankruptcy case. It does not extend to guarantors or cosigners. If anyone else is liable for charges that you made on a credit card, they will still be liable after you file Chapter 7 bankruptcy, regardless of whether the claim is dischargeable against you.
How To Live Without Credit Cards
Budget, budget, budget: Budgeting is your greatest tool in living without credit cards for two reasons.
First, you need to budget enough money each month to pay off your current credit card debt. A good way to get ahead of your debt is to apply for a balance transfer credit card. Look for a card with a zero percent introductory APR, which will save you from paying interest for anywhere from 6-18 months and no or low balance transfer fees which will save you additional money.
Using a balance transfer card to consolidate all your credit card debt on one card will help you get rid of all your other cards.
Second, you should set enough money aside each month to create a savings account for any emergency spending, like for home repair or unexpected medical bills. Look for savings accounts with high APYs, so you can make the most off your investment. Online savings accounts are a good idea because they offer the highest APYs and allow a limited number of withdrawals, which can curb the temptation to spend.
Don’t cancel your credit cards if you don’t have to. When most people decide to live without credit cards, they end up canceling the cards without regard to the consequences. Yes, canceling your credit cards altogether will obviously reduce the risk of spending what you can’t afford. The problem is that it will also hurt your ability to receive other lines of credit, whether that be a car loan, mortgage or student loans for your kids. A better option is to pay off all of your credit cards, and then stop using them instead of cancelling them.
Make sure you have other types of credit: If you do plan on canceling your credit cards, you should keep a diversified credit portfolio full of other types of credit, such as mortgages, auto loans, student loans, etc. While not having credit cards will decrease your available credit, which could hurt your credit score, having these other types of credit will help balance out your credit score and show the credit bureaus that you still know how to utilize the debt you have.
Try a secured credit card: If your score does take a hit after cancelling your cards, or you want to prevent that from happening altogether, try getting a secured credit card. Since secured cards have lower limits – $250 to $500, usually – and the cards report to the credit bureaus, they are good option for people who don’t want to accrue debt but still need a credit card to improve their credit score.
Keep track of your credit score: Living without credit cards may be damaging to your credit score, which may make it difficult to get loans or a mortgage. As your good credit ages out of your credit report, your score will drop, so keeping a close eye on your credit score can alert you to when you need to start rebuilding your credit with other types of loans.
It might also be a good idea to sign up for a credit report monitoring service so you can keep track of how your score is being affected by your lack of credit cards. These services also alert you when there are any changes in your credit report, so they can also help protect against identity theft and fraud.
For a more detailed explanation of your bankruptcy options, let’s schedule a consultation today.
Moshier Law Office, PLLC
St. Paul, Minnesota