Credit Cards and Bankruptcy

The short answer: yes, credit card debt can be discharged, or made to “go away” through bankruptcy. Read on for more of the story...

Bankruptcy is the legal process for an individual or business to obtain relief from their debts in the form of debt elimination or restructuring the terms of repaying the debts. The types of bankruptcy filings is based on this distinction in relief available. Both individuals and businesses can file to eliminate their debts, also referred to a “total liquidation”. This is done by filing for relief under Chapter 7 of the bankruptcy code. Individuals can restructure their debts by filing for relief under Chapter 13. Businesses can restructure their debts by filing for relief under chapter 11. A family farmer can restructure his debts under chapter 12. Under Chapter 7, the individual or business is discharged of any liability on most if not all of their unsecured debts, and unsecured portions of secured debts. A discharge means, the debtor no longer has legal obligation to repay the debt. In 2003, approximately 1,100,000 individuals were able to wipe out their debts under Chapter 7. Almost a half a million were able to restructure their debts under Chapter 13. Approximately 100,000 businesses were able to eliminate their debts under Chapter 7 or restructured and reorganized their debts under Chapter 11.

Unsecured debts, including credit card debt, generally may be defined as those for which the extension of credit was based purely upon an evaluation by the creditor of the debtor’s ability to pay, as opposed to secured debts, for which the extension of credit was based upon the creditor’s right to seize pledged property on default, in addition to the debtor’s ability to pay.

How credit card Issuers evaluate discharge issues...
Credit card issuers sometimes challenge the discharge of their debt in Chapter 7 by filing an adversary proceeding claiming that the debt was incurred by fraud and therefore should be excluded from the discharge. This is sometimes called a "non-dischargeability action". Credit card debt may be non dischargeable in bankruptcy under either of two legal theories:

---The application submitted to get the card was fraudulent
---The card was used fraudulently

Major concerns for card issuers...
While each card issuer has a different practice about non dischargeability actions, each of the following circumstances probably increase the likelihood that the debt may be subject to challenge by the creditor:

• Increase in credit card usage shortly before filing
• Newly issued card
• Large cash advances in months before filing
• Use of card for  recent travel or vacations
• Pattern of borrowing on one card to make payments on others
• Exceeding credit limit
• Using card when unemployed or without reasonable belief that the debt can be repaid

Generally, the longer the length of time between any particular use and the bankruptcy filing, the less likely the usage will trigger a challenge to dischargeability.  Top...

Bankruptcy fraud...
A creditor may challenge the discharge of a debt in bankruptcy if it believes the debt was incurred by fraud. In the credit card context, that usually means that the creditor alleges that either the card was obtained by using false information, or, more frequently, that the use of the card by the debtor was fraudulent. Just claiming that the debt was incurred by fraud is not enough to except the debt from discharge:  the creditor must present facts that prove fraud at trial.

Factors suggesting fraud...
To decide whether a credit card charge was incurred by fraud, judges sometimes use a checklist of factors that suggest fraud, since there is seldom explicit evidence of dishonesty.

• the length of time between the charges and the bankruptcy filing;
• whether or not an attorney had been consulted concerning the filing of bankruptcy before the charges were made;
• the number of charges made;
• the amount of the charges;
• the financial condition of the debtor at the time the charges were made;
• whether the charges were above the credit limit of the account;
• whether the debtor made multiple charges on the same day;
• whether or not the debtor was employed;
• the debtor's prospects,
• whether there was a sudden change in the debtor's buying habits; and
• whether the purchases made were luxuries or necessities.

If you have filed bankrupt one of the next steps is to rebuild your credit. Top...