The historical policy behind bankruptcy is to give debtors, overwhelmed by debt they cannot possibly pay, an opportunity for a clean start so they are not hampered by financial burden for their entire lives. Relief from consumer credit card debt has become a large aspect driving people to file for bankruptcy. Obtaining a total discharge of all credit card debt was fairly easy to do until Congress changed the law in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act. Congress, realizing some people abused bankruptcy laws to receive discharge from debts they had at least some ability to pay, enacted a law aimed at curbing those abuses and some of those changes directly related to consumer credit card debt.

While the economy has partially recovered from the Recession of 2009, there are still a sizable number of people with significant consumer credit card debt, so a discussion of the requirements to discharge this debt in Chapter 7 bankruptcy proceedings may prove useful to those contemplating the pros and cons of entering the bankruptcy process. A discussion of the bankruptcy provisions for discharging credit card debt will appear below.

Credit Card Counseling

Any debtor wishing to file for Chapter 7 bankruptcy is required to attend a financial counseling session from an approved non-profit credit agency within the 180 days preceding the filing a bankruptcy petition. The counseling session can be group or individual and may be conducted over the phone or online. The contents of the presentation must include information about available credit counseling and an analysis of the debtor’s budget. Additionally, once the debtor files, he/she must attend a course of personal financial management before any debts will be discharged.  

Charges Close to Bankruptcy Filing Date

One of the larger attempts to rein in potential abuse in bankruptcy appeared recently in the form of a presumption of fraud for purchases and cash advances from credit cards in close proximity to filing for bankruptcy. Specifically, charges for more than $500 on non-necessary items, or purchases the bankruptcy court could consider to be a “luxury” will likely raise red flags. Cash advances for more than $750 within 70 days of filing a bankruptcy petition will also give rise to a presumption of fraud. Consequently, once you start contemplating bankruptcy, and especially after you speak with an attorney about filing a petition, it is best to limit credit card to the bare essentials, and, ideally, to stop using them completely while in the bankruptcy process.   

Limitations on Discharge

Finally, every debtor who files for Chapter 7 bankruptcy is required to submit a statement of monthly income and a schedule of monthly expenses that the bankruptcy court uses to apply a test in order to determine if the debtor is subject to presumption of abuse. This presumption arises when the when the debtor’s financial information indicates they can in fact repay part of the debt owed. Specifically, if the debtor’s monthly income is more than the state’s median monthly income and the debtor is able to repay 25 percent of the credit card debt after taking into account rent and other necessary expenses, discharge under Chapter 7 will not be granted.  Instead, the debtor will have to go through a Chapter 13 bankruptcy where a payment plan to pay off creditors will be implemented.

Consult an Attorney

Deciding to file for bankruptcy is an overwhelming step for most people that this only made harder by the complicated and often confusing process of working their petition through the bankruptcy courts. Hiring a knowledgeable bankruptcy attorney can provide  peace of mind during this process and is also important to securing the best possible outcome in your case. Attorney Christopher L. Arrington, P.C., represents clients in the Indianapolis area in Chapter 7 bankruptcy cases and is available to help you. Contact him today to schedule an appointment.