How Credit Card Debt is Treated in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is not at all like Chapter 7.  In Chapter 13, you enter into a repayment plan that lasts from three to five years.  Then whatever debt remains unpaid at the end of that period is usually erased.

Reorganization

Chapter 13 is called reorganization bankruptcy.  This means you propose a 3- to 5-year repayment plan that pays your creditors.  Under this plan, some creditors get paid in full, others less, and some get nothing at all.  It depends on what priority the debts have under the bankruptcy law.  Credits cards, because they are unsecured, usually have the lowest priority.

How Debts are Prioritized

The bankruptcy law defines three classes of debt:  secured debt, priority unsecured debt, and general unsecured debt.

Secured debts mean the debts are pledged with an asset.  A car loan is secured with the car.  A home loan is secured with the home.  If you default on a car loan, the lender can take your car.  Likewise with your home.  Credit card debts are usually unsecured, meaning no collateral is securing payment, only your good name.

Under Chapter 13, if you want to keep the property that is security for your loan, then you must pay the loan in full.  (This is not true with mortgages.)

Priority unsecured debts have no collateral as security, but the bankruptcy laws give them priority over other unsecured debts.  Priority unsecured debts cannot usually be erased in bankruptcy.  This means even in a Chapter 7 bankruptcy, these debts would still be yours after the bankruptcy was over.

Some types of income tax obligations are priority unsecured debts.  Also, child support and spousal support obligations are priority unsecured debts.  Under Chapter 13, you must pay these priority unsecured debts in full with interest.

The lowest priority are unsecured debts and credit cards fall into this category.  Whether and how much money you pay on credit card accounts depends on many things.  In most cases, Chapter 13 debtors don’t have to pay their credit card obligations in full.

Still, this is not always true because some credit card debt is secured debt.  In this case, the credit card debt gets paid with the same priority of a secured debt.

Credit Card Debts in Chapter 13

In your Chapter 13 repayment plan, you list your creditors and how much you propose to pay in each of the three categories of debt.

Your payment plan must include paying all secured debts in full if you want to keep the collateral that secures those debts, as well as all priority unsecured debts.

Under the law, you must also pay into your plan whatever you can afford.  This means if you can afford to pay more than your secured and priority unsecured debts, the court will require you to do so.  This means the credit card companies will get some of the money owed to them, depending on the amount of money left over.

Fraudulent Credit Card Charges

The two times when the bankruptcy law says credit card charges are incurred through fraud are when you use a credit card to purchase luxury goods or to get cash advances.

If you used a credit card for luxury items or cash advances near the time you filed for bankruptcy, the court will view these as fraudulent charges.  The credit card company may challenge your attempts to have these bills erased.  You, then, have the opportunity to prove you did not intend to commit fraud, but if the court doesn’t accept your argument, then you will still owe these debts even after your bankruptcy ends.