What bankruptcy does to credit card debt
Bankruptcy is a legal process that stops creditors from collecting and may eliminate or restructure what you owe. For credit cards specifically, Chapter 7 bankruptcy typically wipes out the full balance with no repayment required, while Chapter 13 bankruptcy sets up a repayment plan over three to five years where you pay back a portion of what you owe.
The process itself is filed in federal court, not with your credit card company. You work with a bankruptcy trustee — a court-appointed official who oversees your case — and you may work with a bankruptcy attorney. The court decides what happens to your debt based on your income, assets, and which chapter you file under.
Bankruptcy stops collection calls and lawsuits when ready through an automatic stay, a court order that halts most creditor actions the moment you file. This gives you breathing room, but it also becomes part of your credit history for seven to ten years depending on the chapter.
Key Takeaways
- Chapter 7 bankruptcy eliminates credit card debt entirely if you have few assets, while Chapter 13 sets up a repayment plan over three to five years.
- You file in federal bankruptcy court with the help of a trustee and often an attorney, not directly with your credit card company.
- An automatic stay stops collection calls and lawsuits the moment you file, but bankruptcy remains on your credit report for seven to ten years.
- You must pass a means test to file Chapter 7, which compares your income to your state's median; Chapter 13 has no means test but requires a regular income.
- Court filing fees, attorney fees, and credit counseling courses are required costs that vary by location and attorney.
Chapter 7 versus Chapter 13: which one applies to credit cards
Chapter 7 bankruptcy is a liquidation: the court sells any non-exempt assets you own and uses the money to pay creditors. Credit card debt is unsecured — meaning the card company has no claim to your house or car — so it is typically paid last or not at all. If you have little or no assets to sell, your credit card balances are discharged (erased) at the end of the case, usually within three to six months.
To file Chapter 7, you must pass a means test, which compares your household income over the past six months to your state's median income for a family 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; if what remains is below a threshold set by federal law, you still pass. If you fail the means test, you are directed to Chapter 13 instead.
Chapter 13 bankruptcy is a reorganization: you keep your assets and pay creditors through a court-approved repayment plan over three to five years. The plan is based on your disposable income — what is left after necessary living expenses — so you might pay back 10 percent of your credit card debt or 100 percent, depending on what you can afford. At the end of the plan, any remaining unsecured debt, including credit cards, is discharged.
Chapter 13 requires that you have a regular income; there is no means test. It is often chosen by people who own a home and want to stop a foreclosure, or who have income but not enough to pay everything they owe in full. Credit cards are treated as general unsecured debt, meaning they are paid after priority debts like taxes and child support, and after secured debts like mortgages.
The bankruptcy filing process and timeline
Filing begins with credit counseling. You must complete a credit counseling course from an agency approved by the U.S. Trustee Program before you file. This course is typically online, takes one to two hours, and costs $10 to $50. It covers budgeting and alternatives to bankruptcy; completion gives you a certificate you need to include with your filing.
Next, you or your attorney prepare and file a petition in federal bankruptcy court for your district. The petition includes detailed schedules listing all your debts (including every credit card), assets, income, expenses, and contracts. Filing fees are set by federal law: $338 for Chapter 7 and $313 for Chapter 13 as of 2024, though these amounts change annually. Attorney fees vary widely by location and complexity, typically ranging from $500 to $3,000 for Chapter 7 and $2,500 to $6,000 for Chapter 13.
Once filed, the automatic stay takes effect when ready. Your credit card company must stop collection calls and cannot pursue a lawsuit. Within 21 days, the court holds a 341 meeting (also called the meeting of creditors), where the trustee asks you questions about your petition under oath. Your credit card company rarely attends, but they receive notice and can object if they choose.
In Chapter 7, if no objections are filed and you have no assets to liquidate, the case typically closes within three to six months and your credit card debt is discharged. In Chapter 13, the court confirms your repayment plan (usually within 60 days of filing), and you begin making monthly payments to the trustee, who distributes the money to your creditors according to the plan.
Costs and what you need to prepare
The direct costs of bankruptcy are filing fees, credit counseling, and attorney fees. Filing fees are non-negotiable and set by federal law. Credit counseling is required and costs $10 to $50. Attorney fees are the largest variable: some attorneys charge flat fees for Chapter 7, while others charge hourly rates. Many offer payment plans so you can pay the fee over time before or during the case.
To file, you need to gather documents: recent pay stubs, tax returns from the past two years, bank statements, a list of all debts with creditor names and addresses, proof of homeownership or rental agreement, and documentation of any assets. Your attorney or the court will tell you exactly what is required for your district.
You also need to complete a second course called financial management education before your discharge is final. This course is similar to the credit counseling course — online, one to two hours, $10 to $50 — and covers budgeting and rebuilding credit. Without this certificate, your case cannot be closed.
How bankruptcy appears on your credit report
A bankruptcy filing appears on your credit report as soon as it is filed and remains there for seven years (Chapter 13) or ten years (Chapter 7) from the filing date. The individual credit card accounts included in the bankruptcy also show as "included in bankruptcy" or "discharged in bankruptcy" on your report.
Your credit score typically drops significantly when you file — often by 100 to 200 points or more, depending on your score before filing. However, the impact lessens over time. Many people find that their score begins to recover within one to two years after discharge, especially if they use secured credit cards or become an authorized user on someone else's account to rebuild history.
Lenders view bankruptcy differently depending on the type and how long ago it occurred. A Chapter 7 discharge from five years ago is viewed more favorably than one from two years ago. Some lenders will offer credit after two years; others wait longer. FHA mortgages, for example, typically require two years after Chapter 7 discharge or one year after Chapter 13 discharge (and while still in the plan).
Alternatives to bankruptcy for credit card debt
Bankruptcy is not the only option for managing credit card debt. Debt settlement involves negotiating with your credit card company to accept a lump sum less than what you owe. This typically requires that you stop paying and let the account fall behind, which damages your credit but may resolve the debt faster than bankruptcy. Settlement companies charge fees and do not may provide results.
Credit counseling through a nonprofit agency can help you set up a debt management plan where the agency negotiates lower interest rates with your creditors and you make one monthly payment to the agency, which distributes it to your cards. This does not eliminate debt but makes it more manageable and shows creditors you are taking action. It also appears on your credit report but is less damaging than bankruptcy.
Debt consolidation combines multiple credit card balances into a single loan, usually at a lower interest rate. This requires that you have decent credit and income to may have access to. It does not eliminate debt but reduces interest and simplifies payments. Some people use a personal loan or a balance transfer card with a 0% introductory rate.
Doing nothing and continuing to pay minimums is also an option, though it means paying interest for years and risking collection lawsuits. Bankruptcy makes sense when your debt is so large relative to your income that other options would take many years or are not available to you.
What happens to your credit cards after bankruptcy
After your credit card debt is discharged in bankruptcy, those accounts are closed. You cannot use them anymore, and the card company will not reopen them. The accounts remain on your credit report showing the discharge, and they gradually age off your report over seven to ten years.
You can obtain new credit after bankruptcy, though terms will be less favorable at first. Secured credit cards — where you deposit cash as collateral — are the most common option when ready after discharge. You deposit $300 to $2,500, receive a credit line for that amount, and use the card like a regular card. After 12 to 24 months of on-time payments, many issuers convert it to an unsecured card and return your deposit.
Some credit card companies will issue unsecured cards to people recently discharged from bankruptcy, though interest rates are typically higher (18% to 25% or more) and credit limits are lower. Becoming an authorized user on someone else's account with good payment history can also help rebuild your credit without requiring your own new account.
Frequently Asked Questions
Can I file bankruptcy on just my credit cards and leave other debts alone?
No. Bankruptcy covers all your debts — credit cards, medical bills, personal loans, and others — with limited exceptions. You cannot pick and choose which debts to include. However, if you have a secured debt like a car loan or mortgage, you can keep the asset by continuing to pay that specific debt even after bankruptcy.
Will bankruptcy stop a credit card lawsuit?
Yes. The automatic stay stops lawsuits the moment you file, even if a judgment has already been entered. If a judgment exists, bankruptcy can still prevent wage garnishment or bank levies. You should file before a judgment is entered if possible, as it is easier to reverse than to stop collection after judgment.
How much does bankruptcy cost in total?
Filing fees are $313 to $338 depending on chapter. Credit counseling and financial management courses cost $20 to $100 combined. Attorney fees range from $500 to $3,000 for Chapter 7 and $2,500 to $6,000 for Chapter 13, though many attorneys offer payment plans. Total cost is typically $1,000 to $9,000 depending on complexity and location.
Can I file bankruptcy if I am still working?
Yes. Employment income is actually required for Chapter 13. For Chapter 7, you must pass the means test, which uses your income; having a job does not disqualify you. Self-employed people can file bankruptcy too, though they need to provide additional documentation of income.
What happens if my credit card company objects to my bankruptcy discharge?
Objections are rare for credit card debt. Credit card companies object mainly when they believe fraud occurred — for example, if you charged large amounts shortly before filing. If an objection is filed, the court holds a hearing. If fraud is not proven, the debt is still discharged. Your attorney handles the objection on your behalf.