Credit card debt is usually eliminated (or “discharged”) in a Chapter 7 bankruptcy and paid as a general unsecured debt in a Chapter 13 bankruptcy.
Most of our clients have significant credit card debt. Credit Cards, when used correctly, are great tools. The accumulation of credit card debt is a sign of financial trouble.
Business Credit Cards
In simple terms, there are no such things as business or corporate credit cards. All credit card accounts are individual accounts, even if the name of a business appears on the card. Most often the account is issued in the name of the individual with the business designated as an “authorized user”. In a few cases the account is issued in the name of the business with the individual as a guarantor.
Elimination of Credit Card Debt
There are several reasons why credit card debt might be not discharged or eliminated in a Chapter 7 or Chapter 13 bankruptcy case. In each situation, the creditor must file a lawsuit filed in the Bankruptcy Court asking the Court to exclude the debt from the discharge. This can happen in both Chapter 7 and Chapter 13 cases but rarely happens in Chapter 13 cases.
- For various reasons, discussed in other parts of this site, the Bankruptcy Court can decide not to give the debtor a discharge or to revoke a discharge that the debtor has already received. If the debtor does not receive a discharge, then credit card debt will remain after the bankruptcy case is over.
- Debtors sometimes open credit card accounts using significantly exaggerated or incorrect financial information. Credit card issuers argue that these debtors have committed fraud. Fraud is an exception to the bankruptcy discharge so the debt will remain after the bankruptcy case is over. This problem tends to go away over time, so the longer you have had the account, the less likely that you will have this problem. Also if you have ever carried a balance and paid it in full only to generate another balance, this problem is less likely to occur. This problem only exists if the financial information you provided was incorrect AT THE TIME you provided it – even if your financial circumstances have changed since that time.
- Debtors sometimes use their credit cards more in the days or weeks before a bankruptcy case is filed, or they show a pattern of credit card use which suggests that they never had any intention or realistic ability to repay their credit card debts. Credit card issuers argue that these debtors have committed fraud. Fraud is an exception to the bankruptcy discharge so the debt will remain after the bankruptcy case is over. These patterns include so-called run-ups, purchasing luxury items, taking cash advances, using one credit card line to pay off another (balance transfers), or purchasing high-end consumer electronics or other resalable items. This problem can sometimes be solved by allowing time to pass (at least 90 days) before a bankruptcy case is filed and making minimum monthly payments.
- Debtors sometimes attempt to keep a credit card by not telling us about the account and not listing the debt in their bankruptcy case. If the account has a balance due, this can create serious legal problems. Remember that all bankruptcy papers filed with the Court must be filed under oath and intentionally leaving out a debt is technically perjury. In addition, this is one of the reasons why the Bankruptcy Court might decide not to give the debtor a discharge or to revoke a discharge that the debtor has already received. Finally, credit card companies periodically check credit or get credit reports. When they discover that a bankruptcy case has been filed, they cancel the card. If you have a balance due, this can happen even if the debtor is still paying the debt. The net result is that the debtor still has the debt, may have to deal with criminal charges, and still does not get to keep the account. If the account has no balance due, then there is nothing to be listed in the bankruptcy schedules. There is a chance that the credit card lender may still permit you to keep the account, but it is only a chance. Those periodic credit checks may still lead the account issuer to close your account. Remember that you do not have any right to have a credit card account. It is a privilege that the creditor can withdraw at any time for almost any reason.
Here are some of the things that Judges consider when they are deciding if charges made on a credit card were fraudulent:
- the amount of time passing between the charges and the bankruptcy filing whether or not a bankruptcy attorney had been consulted before the charges were made the charges were over the account's credit limit
- there were multiple charges on the same day
- the number of charges made
- the amount of the charges
- the debtor's financial health at the time the charges were made (employment or prospective employment, was debtor making payments, etc.)
- whether there was a sudden change in buying habits
- whether the purchases were luxuries or necessities
- whether the charges are for cash advances or courtesy checks
- the age of the account
- the payment history over the life of the account