Bankruptcy and Credit Card Debt

June 15, 2011 (Press-News.org) As the economy continues to recover, many Americans are still mired in debt. To get themselves through the recent recession, people often relied on credit cards and home equity lines of credit to keep household bills current.

Money-Zine.com interprets U.S. census figures to say that Americans carried approximately $886 billion in credit-card debt in 2006, which was expected to grow to $1,177 billion by the end of 2010. By these numbers, each U.S. credit-card holder held at least $5,100 in debt in 2006.

With interest rates averaging 14.73 percent, it is unlikely that consumers will have the financial wherewithal to eliminate their debts and maintain decent standards of living.

Joblessness was the main catalyst for relying on credit cards. According to a CNN report, 7.9 million jobs have been lost through the recession. In cities such as Terre Haute, Kokomo, Anderson and Gary, the unemployment rate exceeded the national average of 9.2 percent. As employment rates are slow to recover in these areas, many are considering bankruptcy to eliminate interminable debt and keep their homes out of foreclosure.

This article will explain how bankruptcy works in regard to credit-card debt, how a bankruptcy discharge may affect your ability to obtain credit in the future, as well as how eliminating credit-card debt through bankruptcy may prevent you from seeking such protection in the future.

Bankruptcy Basics

The U.S. Bankruptcy Code is designed to protect individuals who cannot pay their debts. Those seeking bankruptcy protection request court-ordered release of their legal obligations to pay certain debts, thus allowing them to make fresh financial starts. Bankruptcy is helpful in eliminating unsecured debt, which is defined as debt that is not supported by the value of a particular asset such as a house, car or furniture. Examples of unsecured debt include credit-card debt, medical bills, service debts and personal loans.

Debtors choose one of two types of bankruptcy: Chapter 7, known as liquidation or "straight" bankruptcy, or Chapter 13, called "wage earner's" bankruptcy. In Chapter 7 cases, the bankruptcy trustee will gather and sell the debtor's nonexempt property (defined as property that cannot be legally retained by the debtor after the bankruptcy closes) to pay the outstanding bills. Chapter 7 bankruptcies usually involve little, if any, nonexempt property such as high-value cars and furniture, or classic artwork, so most debtors will retain their personal property after their debts are discharged.

Through Chapter 13 bankruptcy, a debtor enters into a repayment plan based on disposable income. Through the plan, debts are combined and restructured into one affordable monthly payment made to the trustee, who uses this money to repay creditors. The debtor may retain his or her personal property (such as a car or home) while catching up on past-due debts. Payment plans last for 36 to 60 months, after which certain debts will be discharged completely.

Bankruptcy on Your Credit Report

A bankruptcy generally reduces a person's credit score by up to 200 points, but it usually depends on the debtor's previous credit history and the types of debts currently on the report. According to Fair Isaac, the company that develops credit scoring formulas, bankruptcy filers are commonly compared to those in similar financial straits. Most people seeking bankruptcy protection do not have favorable scores to begin with, so a drop to 420 from 550, for example, is not a huge concern.

Like Fair Issac, loan officers also consider the circumstances surrounding your bankruptcy if you seek a home or car loan in the future. Filing bankruptcy incident to a divorce is much different than enjoying frivolous spending sprees.

U.S. credit bureaus Equifax, Experian and Trans Union can report a bankruptcy on your credit report for seven years after the discharge. If you do not ask for it to be removed after that time, it can remain on your report for up to 10 years.

Life After Bankruptcy

The good news is that those who discharge their debts through bankruptcy can achieve a favorable credit score within two years after filing. Most achieve this by adopting good spending habits and prudently using a secured credit card. There is one caveat about using bankruptcy to eliminate credit-card debt. Once a Chapter 7 discharge is granted, a person cannot file Chapter 7 bankruptcy again for eight years. This could be problematic if a person files bankruptcy in 2011 to shed consumer debt, then accumulates massive medical debt or falls behind on mortgage payments three years later.

If you are in financial distress from credit-card debt, an experienced bankruptcy attorney can advise you of your rights and options.

Article provided by Jeffrey D Best Attorney at Law
Visit us at www.jeffreybestlaw.com