Does Bankruptcy Help Reduce the Amount Owed on Credit Debt?

With high interest rates and fees, a credit card account can quickly get out of hand, leaving you struggling with considerable credit debt. Bankruptcy is a legal process that helps you manage your overwhelming debts. Not only can you include your credit debts in a bankruptcy petition, filing for bankruptcy can reduce the total amount that you owe.

Facts

• You have two options when filing a personal bankruptcy petition: Chapter 7 and Chapter 13. Chapter 7 bankruptcy requires a liquidation of assets and a complete discharge of all debt exceeding the value of your assets. Chapter 7 is reserved for low-income filers only. If you don't qualify for Chapter 7 bankruptcy, Chapter 13 provides you with a repayment plan you must adhere to for a three to five year period until you've paid off as much of your debt as possible. Both Chapter 7 and Chapter 13 can reduce your credit debt.

Chapter 7

• Chapter 7 bankruptcy can help you reduce -- and even eliminate -- your credit card debt if you don't own significant assets or your assets are protected by your state's bankruptcy exemptions. Otherwise, filing bankruptcy on credit card debt alone may not reduce the amount you owe.

  Through Chapter 7, the bankruptcy trustee will sell your non-exempt assets and the court will distribute the proceeds to your creditors. Bankruptcy courts pay creditors on a priority basis and assign unsecured creditors, such as credit card companies, a low priority. This could result in your credit card company not receiving any payment at all. Regardless of how much you owe or whether all of your creditors receive payment, the court discharges your obligation to the debts when it discharges your bankruptcy.

Chapter 13

• If, after evaluating your income and debt load, the bankruptcy court determines that you are financially capable of paying off all of your credit card debt within three to five years, your credit card company won't reduce the debt you owe. If you cannot afford to pay off the entire debt within a three- to five-year time frame, the bankruptcy court will allow you to pay off as much as possible and discharge the remainder. Thus, even though Chapter 13 requires repayment, it can still reduce your total credit debt.

Features

• Fluctuations in your income over the course of your Chapter 13 payment plan can have a direct impact on how much of your credit debt the court eliminates. Each year the bankruptcy trustee will request a copy of your tax return. If your earnings have increased, the court will expect you to increase your monthly Chapter 13 payments. If your earnings have decreased, however, you can request that the court reduce your payments. This, in turn, reduces the amount of credit card debt you must pay off over the course of the bankruptcy.

Considerations

• If the court dismisses your bankruptcy case early, you not only lose the court's protection from creditor lawsuits, you lose the court's ability to negotiate debts. While a credit card company has no choice but to adhere to a bankruptcy's court's decision to eliminate all or a portion of a debt, it isn't required to negotiate with you alone. Bankruptcy dismissals typically occur when a filer fails to follow instructions or submit the required fees. Paying close attention to your court-assigned responsibilities and making timely payments helps you protect your bankruptcy's status.