The Unusual Way Credit Card Debt is Handled in Chapter 7 Bankruptcy
Richard Fonfrias, J.D.
Chicago’s Financial Rescue
& Bankruptcy Lawyer
Fonfrias Law Group, LLC
Most people think that credit card debt can be erased in Chapter 7 bankruptcy. But that’s not always true.
Credit card debts are unsecured claims, which means they do not have collateral securing the debt. Credit cards are given to people on their personal or their business’s promise to pay. And nothing else.
Credit card debt and other unsecured debts may receive some money from the bankruptcy trustee if you have money in your bankruptcy estate. But this isn’t likely. Which means the balance of your credit card debt will be erased when your case is over.
But that’s not always true. In the case of fraud, your credit card debt may survive your bankruptcy.
Credit Card companies are listed as creditors in your Chapter 7 Bankruptcy. But most Chapter 7 cases have no assets. That’s why the trustee tries to take any assets you have and sell them in hopes of raising enough money to pay creditors. But this rarely happens in full. The money the trustee raises must go to creditors by their legal priority, meaning secured loans, like a home mortgage, get paid first.
Credit card debts are labeled “non-priority claims,” as are most other unsecured debts. And most unsecured creditors in Chapter 7 bankruptcies get nothing.
If any money does exist to pay them, each unsecured creditor, including credit card companies, get the same percentage of their claim. Usually, this means nothing or only a small pittance.
Credit Card Debts That Cannot Be Erased
While most credit card debts can be erased in Chapter 7 bankruptcy, a few cannot. Those not discharged are debts that you incurred through fraud, false misrepresentation, or false pretenses.
The two times when the bankruptcy law says credit card charges are incurred through fraud are these: When you use a credit card to purchase luxury goods or to get cash advances.
Luxury Items. If you purchase more than $650 worth of luxury goods or services on a single credit card within 90 days of filing for bankruptcy, then that debt is presumed by the court to be fraudulent and cannot be erased in Chapter 7 bankruptcy. Luxury goods and services do not include those things that you or your dependents need for support or maintenance. This means that food, clothing, and other daily necessities are not usually labeled luxury goods.
Cash Advances. If you get a cash advance on a credit card for over $925 within 70 days of when you file for bankruptcy, the court presumes that debt to be fraudulent and will not allow you to erase it in Chapter 7 bankruptcy, regardless of how you used the funds.
For luxury goods and cash advances, the court presumes those charges on credit cards were made through fraud. The burden is on you to prove to the court that you intended to repay the charge and reasonably believed you could repay the charge when the payment comes due. Most people filing Chapter 7 bankruptcy find this impossible.
Credit Card Companies Can Challenge Your Efforts to Erase Your Debt
To challenge your attempt to discharge your debt, the credit card company must file a lawsuit in bankruptcy court. If the creditor does not file this lawsuit, then your debts, including those for luxury goods and cash advances, are discharged by the court.
Creditors that want to file a lawsuit challenging your attempt to erase your credit card debt must do so within 60 days of the first meeting of creditors.
If the creditor files this lawsuit, then you must file your answer to the lawsuit if you want to challenge the creditor’s claim. If you do so, then the bankruptcy court will hold a hearing before it decides whether to erase your debt.
Bankruptcy Does Not Eliminate a Cosigner’s Liability
The bankruptcy court’s discharge applies only to the Chapter 7 bankruptcy debtor. It has no effect on people who guarantee or cosign the account. If another person is liable, that person will still be liable after your bankruptcy ends, without regard to whether the claim against you is discharged.