Credit card debt has become a fact of life for countless American families. The average household in the United States has over $6,000 in credit card debt. Illinois currently rides the national average at around $6,253 per household and Missouri remains lower at $4,950 per household.
Those numbers are all significant, but most families can figure out a way to pay off those kinds of debts without them getting out of hand. What happens when credit card debt keeps growing and growing? At some point, the debt collection efforts become unmanageable. That’s when many people ask this question:
“Should I file bankruptcy for credit card debt?”
There isn’t a one-size-fits-all answer to this question, but there are some important things you need to know if you’re considering bankruptcy for credit card debt in Illinois or Missouri. Read on to learn more, or contact A Bankruptcy Law Firm, LLC for help.
The Risks of Falling Behind on Credit Card Payments
When you begin to fall behind on credit card payments, your financial situation can go from bad to worse at high speed. Here are some of the things that can happen:
Higher Interest Rates and Fees
Credit card companies want their money, and they will go to great lengths to get what you owe and increase your debt at the same time. First, when you start to fall behind on your credit card payments, the credit card company may decide to increase your interest rate. That creates a big problem — you already couldn’t make your payments, and now that your interest rate is higher, you’ll have an even harder time paying down that debt.
On top of raising your interest rate, the company may charge you additional fees, such as late payment fees and over-balance fees. These fees may be relatively small individually, but they add up quickly as your credit card situation gets worse.
Debt Collection Actions
If your credit card debt becomes really bad, the credit card company may send your account to a debt collection company. This is when the creditor harassment often starts. You may get calls from them at work and at home, as well as letters in the mail.
The credit card company may take an additional, extremely stressful action against you: a debt collection lawsuit. This basically means the company is suing you to recover your credit card debt. If you’re unable to pay up or simply don’t pay attention to the lawsuit, the court may allow a default judgment against you.
This judgement is for the amount you owe the creditor, and it will continue to accrue interest until you pay it. The credit card company can often add to the judgment amount with legal fees and related expenses.
Filing a lawsuit against you can allow a credit card company to garnish your wages in both Missouri and Illinois. Through wage garnishment, creditors can take up to 25 percent of your income in Missouri and 15 percent in Illinois.
Understanding Credit Card Debt
If you’re thinking about filing bankruptcy for credit card debt, you first need to understand that, in most cases, credit card debt is considered unsecured debt. This means you don’t have an asset that is backing up the amount of money you owe. A secured debt, such as a mortgage, holds an asset like your home as collateral, meaning the creditor can take the asset away from you if you don’t pay.
As an unsecured debt, credit card debt isn’t backed by physical property or assets. You are expected to pay back the money. However, if the credit card company obtains a judgment against you for the debt, it may be able to take legal actions like wage garnishment or even foreclosure to affect your property and income.
What Happens After Filing Bankruptcy for Credit Card Debt
As your credit card debt picks up, so do the harassing phone calls, collection letters, and other stressful actions. Your daily life becomes a whirlwind of financial anxiety, and it feels like you are dropping deeper and deeper into a hole you can’t climb out of.
After you file bankruptcy, all of that stops. That’s thanks to the automatic stay, which takes effect immediately after you file bankruptcy. Under the automatic stay, your creditors can no longer take actions to recover your debts until your bankruptcy case is resolved.
Bankruptcy Options for Credit Card Debt
There are several kinds of bankruptcy, but the two most common choices for individuals dealing with credit card debt are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy and Credit Card Debt
In Chapter 7 bankruptcy, you sell off some of your assets to pay a portion of your debts, and the rest of the amount owed is discharged, which means it is erased. Chapter 7 bankruptcy is typically a highly effective way to get rid of credit card debt, but there are some exceptions.
For example, if you used your credit card to buy a large amount of luxury items — more than $675 worth — shortly before filing bankruptcy, you may not be able to have that portion of your credit card debt discharged. Keep in mind that the word “luxury” in this context does not just refer to jewelry and spa services. It means anything you didn’t need in order to live.
Another example of credit card debt that Chapter 7 may not erase is a credit card charge for a non-dischargeable debt. Student loans, back taxes, alimony, and child support are all examples of non-dischargeable debt. If you used your credit card to pay for these, those charges may not be discharged through Chapter 7 bankruptcy.
Chapter 13 Bankruptcy and Credit Card Debt
Chapter 13 bankruptcy lets you keep your property, but you have to come up with a debt repayment plan and make payments for three to five years. This option is typically best for people who have a good income.
Most Chapter 13 filers don’t repay all of their debts, and that includes credit card debt. Instead, they pay a portion of what they owe over three to five years, and the rest is discharged at the end of the repayment period.
If you’re currently unable to make consistent payments on your credit card bills, Chapter 13 may prove difficult for you unless your financial situation changes. Keep in mind that, if you miss Chapter 13 payments, your bankruptcy case can be dismissed. Then, you’ll still be on the hook for your credit card debts. An experienced bankruptcy lawyer can help you decide which type of bankruptcy is right for your situation.
Should I Keep Paying on My Credit Cards After Filing for Bankruptcy?
If you successfully file bankruptcy, you will no longer be expected to make credit card payments. Instead, you will have to follow the Chapter 13 repayment plan or liquidate your applicable assets under Chapter 7. Continuing to make payments on credit card debt that will be discharged at the end of your bankruptcy won’t really make sense.
However, if you are thinking about filing bankruptcy for credit card debt, you need to continue to make the payments that you can until you have decided for sure and found out that you qualify to file. To file Chapter 7 bankruptcy, you have to pass the means test. And if your debt is too high or you’re not current on your taxes, you may be unable to file Chapter 13. In either case, if you skipped credit card payments but then found out you don’t qualify for bankruptcy, you might have made your situation much worse.
Alternatives to Bankruptcy for Credit Card Debt
Bankruptcy is often a good option for those struggling with credit card debt, but it may not always be the best fit. If your debt is not high enough or credit card debt is the only kind of debt you have, you may want to consider alternatives to bankruptcy.
For example, instead of filing bankruptcy, you may be able to obtain a debt settlement that allows you to pay off a portion of your credit card debt that your creditors agree to. Alternatively, a credit counselor may be able to help you develop a debt management plan that lays out a path for paying off your credit cards.
Other alternatives to bankruptcy for credit card debt include the following:
- A debt consolidation loan
- A balance transfer credit card
- Paying off credit cards strategically to target either the highest-interest accounts or smallest accounts first
It’s important to speak with a qualified financial professional or attorney before making any major financial decisions like those outlined above. A bankruptcy attorney can review your financials at no cost to help you determine the best course of action for debt relief.
How Filing Bankruptcy Will Affect Your Credit
The problem with falling behind on your credit card payments is that your credit score takes a dive. Many people worry that filing bankruptcy will severely impact their credit, and they are right in the sense that Chapter 7 bankruptcy can negatively affect your credit for 10 years and Chapter 13 can do so for seven years.
However, because you are considering bankruptcy for credit card debt, the impact of bankruptcy on your credit may actually yield a net positive effect over time. Your credit score may go lower after bankruptcy, but you will not have to worry about the continual impact of credit card debt on your score. As you make sound financial decisions and manage your debts well, you will likely see your credit score start to rise.
A qualified bankruptcy lawyer can help you understand the total effect of filing bankruptcy on your credit.
Considering Bankruptcy for Credit Card Debt? Contact Us
Bankruptcy isn’t always the answer for severe credit card debt, but it can be. Before you take any drastic financial action, you need to understand your options and the implications of filing bankruptcy. A Bankruptcy Law Firm, LLC, is here to help with that. Our experienced bankruptcy attorneys have helped countless Missouri and Illinois families take back control of their financial situations.
If you’re dealing with credit card debt and considering bankruptcy, reach out to us. We’re ready to build your game plan and walk you through every step. Give us a call at (800) 7-BENSON or contact us online today.