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Walking Away From Debt Vs. Filing Bankruptcy

Bankruptcy can rid you of your credit card debt but it does come with consequences.

credit card debt
Updated July 8, 2024
Written by Rachel Alulis
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Key takeaways

  • Defaulting on your debt usually occurs before filing for bankruptcy.
  • Bankruptcy can offer a fresh start and discharge most, if not all, of your credit card debt.
  • You can file either Chapter 7 or Chapter 13, depending on what you owe and your disposable income.

A delinquent account can be one of the first indicators of serious financial problems. The more credit card bills pile up that you can’t pay, the more tempting it is to walk away from your debt. In other words, default. The thing is, defaulting won’t solve all your problems. To get a clean slate and a fresh start, you may be better off declaring bankruptcy on credit card debt.

Let’s explore how defaulting can lead to bankruptcy for credit card debt and what both entail.

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Understanding secured and unsecured debt

There are two different types of debt: secured debt and unsecured. Secured debt is backed by collateral, meaning lenders have a claim on an asset if you default. Common examples are mortgages and auto loans. If you fail to make payments, the lender can repossess the asset to recover the owed amount.

Unsecured debt, on the other hand, is not backed by any specific asset. Credit cards, medical bills, and personal loans fall into this category. Lenders rely on your promise to repay and may resort to legal action if you default.

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What happens when I default?

When you first miss payments on your loan or credit card, your account is considered delinquent. The lender will likely charge a late fee, send you reminders, and may even call. As you continue to miss payments, you will be considered in default and the consequences will intensify.

Credit score impact of defaulting

When you’re 30 days late, the credit card company will report your missed payment to the credit bureaus, dropping your score by 15 to 80 points. Every subsequent missed payment will be reported, further dragging your score down. Missed payments stay on your credit report for up to seven years, though the impact lessens over time.

Debt collection actions

At 90-120 days past due, the credit card company will likely close your account and sell it to a debt collection agency. These agencies are known for their persistent phone calls, letters, and emails. If these attempts fail, collection agencies may take you to court. A debt collection lawsuit can result in wage garnishment, bank account levies, or property liens. Additionally, having an account in collections will be reported to credit bureaus, further damaging your score.

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How to declare bankruptcy

Declaring bankruptcy can provide a fresh start and it can protect you from debt collection lawsuits and other legal actions if you’re already in default.

Here’s how to file bankruptcy on credit cards:

  1. Consult an attorney: Bankruptcy law is complicated. A lawyer ensures you file correctly and most attorneys offer a free consultation.
  2. Gather financial documents: Collect information on your debts, income, expenses, and assets. This includes credit card statements, bank statements, tax returns, and pay stubs.
  3. Credit counseling: Complete a mandatory session from an approved agency within 180 days before filing.
  4. File the petition: Submit a bankruptcy petition to the court along with schedules of assets, liabilities, and other financial details.
  5. Attend the 341 meeting: This meeting with creditors allows them to ask questions about your financial situation and plan.
  6. Complete debtor education: Before debts can be discharged, complete a debtor education course.

There is no such thing as bankruptcy for credit card debt only; when you declare bankruptcy, you do so on all your debts.

Qualifications for filing bankruptcy

Before filing bankruptcy on credit cards, you’ll need to determine if you meet the qualifications.

For Chapter 7 bankruptcy, you must pass a means test. The test compares your income from the previous six months to the median income in your state. If your income is below the median, you qualify. If it’s above, you may still qualify. Deduct essential expenses (housing, food, clothing, transportation, utilities, etc.) from your income and see if there is enough left to pay your debt. If there isn’t, you can file for Chapter 7.

If you don’t qualify for Chapter 7, you may qualify for Chapter 13. Chapter 13 requires that you have enough income to pay down your debt. Your secured debt must be less than $1,257,850, and your unsecured debt must be less than $419,275.

How much should you owe to file for bankruptcy?

Find out how much debt you need for bankruptcy.

Chapter 7 bankruptcy for credit card debt

Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” aims to discharge most unsecured debts, including credit card debt.

Bills that can be discharged include:

overdue credit card bills
  • Credit card bill
  • Medical bills
  • Utilities
  • Personal loans
  • Old rent payments
  • Phone bills

When you file Chapter 7, your assets will be sold, and the proceeds used to repay creditors. Assets you need to live, such as your house, car, and clothing, will not be sold. Non-exempt property includes a second house or vehicle, art, and luxury items.

Exceptions for eliminating debt with Chapter 7 bankruptcy

Not all debts can be discharged. You will still be expected to pay child support, alimony, most back taxes, student loans (except in cases of undue hardship), fines or penalties owed to government agencies, and debt obtained through fraud.

Fraud could be making false statements to get a credit card or using your card to purchase more than $725 in luxury items or services within 90 days of filing. Luxury items are anything that is not essential for living. It’s also considered fraud if you take out a cash advance of $1,000 within 70 days of filing.

Credit card debt on high-end purchases such as appliances, furniture, or jewelry may also not be discharged. Instead, the creditor may consider the item collateral and ask for it to be sold. You may be able to wipe out the debt, but you will not be able to keep the property.

Credit card debt from paying for non-dischargeable debts

Since most credit card debt is dischargeable, it may seem like a good idea to pay non-dischargeable debts (child support, taxes) with your card. Do not do this. These transactions will be classified as fraudulent and you will not be able to discharge them.

Chapter 13 bankruptcy for credit card debt

Chapter 13 bankruptcy is often referred to as “reorganization bankruptcy.” It offers a structured way to manage and repay bills without liquidating assets.

With Chapter 13, you submit a repayment plan based on your monthly income. Plans normally take three to five years and cover repaying most, if not all, of your debt.

A court trustee must approve the plan. Once you’ve made all the required payments, the rest of your debts will be discharged. Most people only pay a portion of their total credit card debt.

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What happens after filing bankruptcy?

After filing, an automatic stay is enacted, halting most collection activities, including phone calls, lawsuits, wage garnishments, and foreclosures.

Chapter 7: A trustee is appointed to review your case, liquidate non-exempt assets, and distribute the proceeds to creditors. Most of your unsecured debts will be discharged within a few months.

Chapter 13: You will work with a trustee to implement a court-approved repayment plan, consolidating all you owe into manageable monthly payments over three to five years. Once the plan’s complete, the remaining unsecured debts will be discharged.

There are severe consequences for having credit card debt discharged. Your score will drop by 100 to 200 points. If you already have delinquent accounts and are considering not paying, your score has likely already taken a hit. This will bring it down further.

Additionally, Chapter 7 stays on your credit report for up to ten years and Chapter 13 for up to seven years. The good news is that the further you get from filing, the less impact it has on your score.

Should I keep paying my credit cards after filing for bankruptcy?

There is no point in continuing to payments after you file. Paying can actually complicate bankruptcy proceedings. Instead, focus on adhering to the guidelines set by the court and your attorney for a successful discharge.

Can credit card companies sue me after I file for bankruptcy?

Once you file, an automatic stay is enacted, preventing creditors from suing you or continuing existing lawsuits. It remains in effect throughout the bankruptcy process. This legal protection halts most collection actions, including lawsuits, wage garnishments, and calls.

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Are there credit card debts that I can’t erase with Chapter 7 bankruptcy?

While Chapter 7, often referred to as credit card bankruptcy, can discharge most credit card debts, there are exceptions. Fraud, using a credit card for non-dischargeable debts, and luxury purchases or cash advances made shortly before filing will not be dischargeable.

Can I file Chapter 7 bankruptcy without an attorney?

Filing without a bankruptcy attorney is not recommended. The laws and procedures are complex, and a single mistake can lead to your case being dismissed or debts not being discharged. An attorney provides expertise and help you understand exemptions and protect your assets. While hiring an attorney involves costs, the investment can significantly increase the chances of a successful outcome.

Can I file Chapter 7 bankruptcy to erase credit card debt?

A common question that arises is, “Can you file bankruptcy on credit cards?” The answer is yes. Almost all credit card debt can be discharged through bankruptcy. The process involves liquidating non-exempt assets to pay creditors, but many personal assets are protected under exemption laws.

Read more about credit cards!

Alternatives to bankruptcy for credit card debt

Bankruptcy is a legal proceeding with major consequences. Before you go this route, consider alternatives.

  1. Debt consolidation: Rolls multiple credit card balances into a single loan with a lower interest rate. You have one manageable bill and pay save money.
  2. Debt management plan: Work with a certified credit counselor to develop an affordable repayment plan. They can negotiate lower interest rates and waive fees with creditors.
  3. Debt settlement: Negotiate with creditors to accept a lump-sum payment that is less than the full amount. You may save money but your score will likely drop significantly.
  4. Borrow from family or friends: Loans from family or friends at little to no interest can help pay off high-interest debt.
  5. Balance transfer credit card: Transfer high-interest credit card balances to a card with a lower interest rate or an introductory 0% APR period.

Not every debt relief option is right for every situation. Take a look at your finances and talk with a credit counselor to determine the best strategy for you. Initial consultations are typically free.

Frequently asked questions

1. What debt is not forgiven in a straight bankruptcy?

Debts that cannot be discharged include most student loans, child support, alimony, most back taxes, and fines or penalties owed to government agencies. Debts incurred through fraud or malicious actions are also typically not forgiven.

2. Can credit card debt be written off in bankruptcy?

Yes, Chapter 7, in particular, is designed to clear most unsecured debts, including credit cards. However, it’s important to understand that not all credit card debts are dischargeable, especially if incurred through fraud.

3. How to get rid of credit card debt without filing for bankruptcy?

Consider a debt management plan, debt consolidation, or negotiating a lump-sum payment with creditors. Budgeting and reducing expenses can also accelerate repayment.

4. What happens if I can’t catch up with my credit card payments but don’t file bankruptcy?

Creditors will charge additional late fees and penalty interest rates. They will likely sell the account to a collection agency that may sue you. Debt collection lawsuits can result in wage garnishments or liens on your property.

Bottom line

Bankruptcy for credit card debt provides a structured way to reset your finances, whether through Chapter 7’s liquidation process or Chapter 13’s repayment plan, but it still contains the stigma of financial failure.

Is bankruptcy bad? It is not inherently bad. It is a legal tool designed to provide relief and a fresh start. It’s true that it should be considered a last resort, but it’s better than continuing to walk away from your financial obligations.

If you decide that bankruptcy is the best course of action, consult with a lawyer for help navigating the process and rebuild your financial life.

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About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.

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