We live in a time where most people live paycheck to paycheck, and the idea of an emergency fund is non-existent. When people encounter an emergency, oftentimes they will use their credit card to cover the unexpected expense simply because they have no other choice. If you are able to pay off the expense in a timely manner, the debt may not become a burden, but if you were able to pay off the expense, you would probably have built up an emergency fund in the first place. If you have seen your credit card debt slowly grow to the point that you can’t keep up, it may be time to explore the option of filing bankruptcy.
Every person has different circumstances that have led to being in debt. When we look at filing bankruptcy, the first step will be to take the means test. This tests helps us to determine what Chapter 7 or 13 would be best for you. Chapter 7 cases are usually considered “no asset” because you only have the property that you live in and that property is considered exempt from being sold to repay creditors. If you do happen to have property that the trustee can sell to repay some of your debts, they will pay back creditors in order of priority. Credit cards are listed as a low priority, and in many cases they are not repaid at all.
One of the responsibilities the court trustee has is to be on the lookout for signs of Bankruptcy Fraud. If a person, just prior to filing bankruptcy, uses their credit card for cash advances or the purchase of luxury items, this could be seen as committing bankruptcy fraud. In this case, that portion of your debt will not be included in your bankruptcy. When you believe that you may need to file bankruptcy, it is best to stop all credit card use at that time to avoid any suspicion of fraud.
If you don’t pass the Means Test or you want to keep all of your property, Chapter 13 might be your best choice. Filing a chapter 13 will give you the option of reducing your payments and re configuring your debts and putting together a 3-5 year repayment plan. Over the course of that time, some of your debts will be paid off, and some will be discharged once you have completed your plan. With the repayment plan, you do not make the decisions on who gets paid first, the court trustee allocates payments in order of priority.
- SECURED– Secured debt is “secured” by the property that you’re making payments on. If you want to keep your property, these debts need to be paid off completely, either during the repayment plan or over the life of the loan. If you fall behind on your payments, the property may be taken by the court or your creditor.
- Priority unsecured – Priority unsecured debts may not be discharged in a Chapter 7 and must be paid off completely if you’re filing a Chapter 13. This includes child support, alimony, student loans, and most types of back taxes.
- General unsecured – Credit cards are general unsecured debts, but this category also includes medical bills, utilities, and the like. As the last priority, these debts are often not paid at all in a Chapter 13.
If you choose to file a Chapter 13, we will help you to establish a repayment plan that allows you to make all your required payments on secured and priority unsecured debts. Then we will take a look at your basic living expenses. Any income that remains will need to be allocated toward general unsecured debts.
At the end of your repayment period, any remaining debt will be discharged.
Only you know if you are drowning in debt. Depending on the amount and interest, some credit card debt will take your lifetime to repay. It may be time to consider if you want or can devote the rest of your life to repaying the debt or if it’s time for relief.