What bankruptcy does to credit card debt
Bankruptcy is a legal process that lets you either erase certain debts or reorganize them into a repayment plan you can actually afford. For credit card debt specifically, bankruptcy can wipe out what you owe entirely — but it comes with real costs to your credit report and your ability to borrow for years afterward. The decision to file depends on how much you owe, whether you have other assets, and whether you could pay it back over time if the terms changed.
There are two main types of bankruptcy that affect credit card holders: Chapter 7 and Chapter 13. Chapter 7 erases unsecured debts like credit cards, medical bills, and personal loans, but you may lose property to pay creditors. Chapter 13 sets up a three- to five-year repayment plan where you pay back some or all of what you owe, and you keep your property. Which one you can file depends on your income and how much debt you carry.
Key Takeaways
- Chapter 7 bankruptcy can erase credit card debt entirely, but you must pass a means test based on your income, and creditors may seize non-exempt property to recover money.
- Chapter 13 bankruptcy creates a court-approved repayment plan over three to five years, letting you keep your property while paying back part or all of your credit card debt.
- Filing bankruptcy costs between $300 and $400 in court fees plus attorney fees, which typically range from $1,500 to $3,500 for Chapter 7 and $2,500 to $6,000 for Chapter 13.
- A bankruptcy filing stays on your credit report for seven to ten years and will lower your credit score significantly, making it harder to get loans, credit cards, or favorable interest rates during that time.
- You must complete credit counseling before filing and a financial management course after filing, both of which are required by law and cost between $50 and $150 each.
Chapter 7 bankruptcy: erasing credit card debt
Chapter 7 bankruptcy discharges (erases) most unsecured debts, including credit card balances, in four to six months. You do not have to repay what you owe. However, you must pass the means test, which compares your income to the median income in your state for a household your size. If your income is below the median, you pass automatically. If it is above, the test subtracts allowed living expenses and debt payments from your income; if anything is left over, you may not may have access to for Chapter 7.
The trade-off is that a Chapter 7 trustee — a court-appointed official — can sell your property to pay creditors. Most people keep their home and car because state and federal laws exempt certain assets from sale. The amount of equity you can protect varies by state. Some states let you exempt $20,000 to $30,000 in home equity; others allow much more or use federal exemptions instead. If you own a car outright or have significant savings, you may lose some of it.
Chapter 7 stays on your credit report for ten years. Your credit score typically drops 130 to 200 points when ready after filing. You can rebuild it over time, and many people find they may have access to for credit again within two to three years, though at higher interest rates.
Chapter 13 bankruptcy: repaying credit card debt on a new schedule
Chapter 13 bankruptcy is a reorganization plan, not a discharge. You propose a repayment plan to the court that lasts three to five years. During that time, you make one monthly payment to a trustee, who distributes it to your creditors according to the plan. Credit card debt is usually unsecured, which means it ranks lower in priority than secured debts (like a mortgage or car loan) and recent tax debt. In many Chapter 13 plans, credit card holders pay back only a portion of what they owe, and the rest is erased when the plan ends.
You keep all your property in Chapter 13 — your home, car, and savings are protected. This makes Chapter 13 the right choice if you have assets you cannot afford to lose or if you earn too much to pass the Chapter 7 means test. The monthly payment is based on your income and expenses, and the court must find it reasonable before approving the plan.
Chapter 13 also stays on your credit report for seven years (shorter than Chapter 7). Your credit score takes a hit, but you are making payments on time during the plan, which can help rebuild your score faster than Chapter 7. Once you complete the plan, remaining credit card debt is discharged.
The costs of filing bankruptcy
Court filing fees are set by law: $335 for Chapter 7 and $310 for Chapter 13 as of 2024. You may request a fee waiver if your income is below 150% of the federal poverty line, or you can ask the court to let you pay in installments.
Attorney fees are the larger expense. A Chapter 7 bankruptcy typically costs $1,500 to $3,500 in legal fees, depending on your location and the complexity of your case. Chapter 13 usually runs $2,500 to $6,000 because the attorney must draft and manage your repayment plan. Some attorneys offer payment plans or reduced fees for lower-income filers. You can file without an attorney, but bankruptcy law is complex, and mistakes can cost you — for example, failing to list a debt correctly or missing a important date can result in dismissal.
You must also complete two mandatory courses: a credit counseling course before filing (cost: $50 to $150) and a financial management course after filing (cost: $50 to $150). Both are offered online and take one to two hours.
How the bankruptcy filing process works
The first step is meeting with a bankruptcy attorney for a consultation. Many offer free initial consultations. The attorney will review your debts, income, assets, and expenses to determine whether Chapter 7 or Chapter 13 makes sense for you. If you decide to proceed, you will complete the required credit counseling course before filing.
Your attorney then prepares a petition and schedules — detailed forms listing all your debts, income, property, and expenses. These documents are filed with the bankruptcy court in your district. The court assigns a trustee to your case. For Chapter 7, the trustee reviews your assets and may sell property; for Chapter 13, the trustee manages your repayment plan.
About three to six weeks after filing, you attend a 341 meeting (the meeting of creditors). The trustee and your creditors can ask you questions about your finances and debts. Most creditors do not attend. You must answer truthfully. After the meeting, you complete the financial management course.
For Chapter 7, the trustee has about 60 days to decide whether to sell any of your property. If there is nothing to sell, the case moves toward discharge. You receive a discharge order, usually four to six months after filing, which erases your debts. For Chapter 13, the court must confirm your repayment plan, which typically happens within 45 days of filing. You then begin making monthly payments to the trustee.
How bankruptcy affects your credit and borrowing
Bankruptcy is the most damaging event on a credit report. A Chapter 7 filing drops most credit scores by 130 to 200 points; Chapter 13 typically causes a drop of 130 to 150 points. The impact is largest when ready after filing and gradually lessens over time.
Bankruptcy stays on your credit report for ten years (Chapter 7) or seven years (Chapter 13). However, its effect on your score weakens as time passes. After two to three years, many people may have access to for a mortgage or car loan again, though at higher interest rates. Credit cards may become available sooner, often within one to two years, sometimes through secured card programs that require a cash deposit.
Some employers and landlords check credit reports, and bankruptcy may affect their decisions. However, federal law prohibits employers from firing you because of bankruptcy. Landlords can consider it, but many do not. Government jobs and positions requiring security clearances may have stricter policies.
Alternatives to bankruptcy for credit card debt
Bankruptcy is not the only option. Debt consolidation combines multiple credit card balances into a single loan with a lower interest rate, reducing your monthly payment. This works if you have decent credit and can may have access to for a personal loan or balance transfer card. You still owe the full amount, but over a longer period.
Credit counseling through a nonprofit agency can help you create a budget and negotiate with creditors. Some agencies offer debt management plans, where the agency contacts your creditors to lower interest rates and waive fees, then you make one monthly payment to the agency. This does not erase debt, but it can make it manageable. Debt management plans do appear on your credit report and may affect your score, but less severely than bankruptcy.
Debt settlement involves negotiating with creditors to pay a lump sum that is less than what you owe. This can damage your credit and may have tax consequences, but it resolves the debt faster than a repayment plan. Settlement companies charge fees and often advise you to stop paying creditors, which can trigger lawsuits.
If your income is very low and you have little property, bankruptcy may be the best option because other routes require money you do not have. If you have stable income and can afford payments, a debt management plan or Chapter 13 might preserve your credit better.
Frequently Asked Questions
Will bankruptcy erase all my credit card debt?
Chapter 7 erases most credit card debt, but you must pass the means test based on your income. Chapter 13 does not erase debt when ready; instead, it creates a repayment plan, and any remaining balance is erased after you complete the plan. Both assume your credit card debt is unsecured, which it usually is.
Can I keep my house and car if I file bankruptcy?
In Chapter 7, you keep your home and car if the equity is protected by state or federal exemptions and you are current on payments. If you owe more than the car is worth, you can usually keep it. In Chapter 13, you keep all property as long as you complete your repayment plan. If you fall behind on mortgage or car payments, the lender can still foreclose or repossess.
How long does bankruptcy take?
Chapter 7 typically takes four to six months from filing to discharge. Chapter 13 takes three to five years because you must complete the repayment plan. The timeline can extend if the court objects to your plan or if you miss payments.
Can I file bankruptcy more than once?
Yes, but there are waiting periods. You must wait eight years between Chapter 7 filings, four years between Chapter 13 filings, and six years if you file Chapter 7 after Chapter 13. These waiting periods are measured from the date you filed the previous case, not from discharge.
What happens to my credit cards after bankruptcy?
Credit cards are discharged in Chapter 7, meaning the accounts are closed and the debt is erased. In Chapter 13, you may keep cards open if the plan allows, but you cannot incur new debt without court permission. After discharge, you can explore for new cards, though limits will be low and interest rates high at first.