Is Bankruptcy the Right Option for Mounting Credit Card Debt?

Credit card debt is common in American households. According to LendingTree, in 2023, Americans had an astonishing $1.129 trillion in credit card debt. Credit card holders in New Jersey had the highest debt, with an average of $8,757. Missing even one payment triggers a cycle of accruing late fees and climbing interest rates that continue to mount monthly, the balance far surpassing what consumers actually spend. For many households, credit card debt is all-consuming.

It is crucial to understand that falling behind on credit card payments can significantly worsen your financial situation. This can have a ripple effect, impacting other areas of your life and your ability to secure credit or loans. Credit card debt can create serious repercussions, such as the following:

  • Lower credit scores: Credit scores are everything in today’s world. In addition to influencing whether you qualify for loans or credit and the interest rate or premium you pay, credit scores can also affect your ability to find housing or employment. High and mounting credit card debt lowers your overall score and drastically affects your day-to-day life.
  • Remains on file: Bankruptcy, in addition to lowering your credit scores, remains on your credit report for a significant period, typically seven to 10 years. While this does initially lower your score, it can be advantageous in the long term, as you will no longer have the continual monthly impact of credit card debt on your score. This means your credit score can start to rise in the months and years following bankruptcy, providing a potential path to financial recovery.
  • Higher interest rates: Credit is a multi-billion-dollar industry, and card companies are for-profit enterprises that collect massive profits in fees and interest rates. Typically, the higher your balance, the more interest you will be charged, bringing in more profit for the credit card company and increasing your already high balance.
  • Debt collection: The consequences can be severe when credit card debt becomes unmanageable. If your debt grows too large or you stop making payments, your account may be sold to a debt collector. These collectors often employ aggressive methods to collect the debt, creating a stressful and potentially damaging situation for you. Understanding the potential outcomes of not managing your credit card debt effectively is crucial.
  • Wage garnishment: Credit card companies can sue you and garnish your wages to recover unpaid balances, automatically taking up to 25 percent of your paycheck until the balance is paid.

What Bankruptcy Options Do I Have for Credit Card Debt?

To understand how bankruptcy functions, you must first understand credit card debt. Credit card debt is considered unsecured debt, meaning it has no valuable asset that can be sold to pay what you owe. Secured debt, on the other hand, holds an asset as collateral that can be seized and sold if you default on payments, such as the home, which is the secured asset in mortgage loans.

Two types of bankruptcy are typically used for credit card debt: Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy is the most common and quickest type of bankruptcy and completely discharges all unsecured credit, including credit card balances. You cannot file for Chapter 7 bankruptcy only for credit card debt. Eligibility for Chapter 7 bankruptcy includes:

  • Completion of approved credit and debt counseling no more than 180 days before filing.
  • Completion of a waiting period of 181 days to refile if a prior application was dismissed.
  • No previous Chapter 7 bankruptcy filings in the last eight years.

Completing a financial scrutiny test affirming that the previous six months’ average monthly income is less than the state median income for the same-size household or passing a means test of your disposable income is sufficient to make partial repayments.

Chapter 13 bankruptcy is court-ordered and resolves debt by reorganizing priority repayment rather than discharging for those with a steady income. In Chapter 13, you can retain high-equity secured assets, such as real estate, placing an automatic stay of foreclosure to develop a three-to-five-year repayment plan for part or all of the debt in order of priority. Most Chapter 13 filers have mortgages in arrears and unpaid bills due to unexpected loss of employment or an inability to work due to a sudden serious illness.

Chapter 13 bankruptcy can be filed repeatedly and includes more types of dischargeable debt than Chapter 7 bankruptcy. It allows you to retain all of your assets, reduce your other debts, protect co-signers, and give you more time to pay non-dischargeable debt, such as back taxes and child support.

If you are having difficulty making consistent payments on your credit card bills, Chapter 13 may not be your best choice. Under Chapter 13, if you miss payments, your bankruptcy can be dismissed, and you will be required to pay the remaining balances.

Filing for bankruptcy, whether for mounting credit card debt or other reasons, is rarely easy. While bankruptcy can relieve the stress and harassment from creditors, it does have long-term effects on your credit history. Many feel that filing for bankruptcy, along with unmanageable debt or inability to pay them, is a personal failure and shameful. It is not.

Every individual experiences financial hardship, job loss, or unexpected expenses. Filing for bankruptcy is not a personal failure but rather an act of responsibility. Bankruptcy allows you to take action to address your debt, learn better management skills, and make a fresh start toward a better financial future. If you are not sure whether bankruptcy is the right choice for you, consider the following:

  • Do you have little to no disposable income?
  • Is your monthly income below the state median?
  • Is your accumulated debt more than 50 percent of your annual income?
  • Will paying your debt take more than five years to accomplish on your own?
  • Is your debt consuming or negatively affecting every aspect of your life?

If more than one of these questions pertains to you, bankruptcy may be your best option. If unsure, you should review your situation with an experienced Freehold bankruptcy lawyer who can assess your debts, answer your questions, and advise you of your options.

Our Somerville Bankruptcy Lawyers at Lyons & Associates, P.C. Help Clients Take Control of Their Financial Future

If you have mounting credit card debt you are struggling to conquer, bankruptcy may be the solution. Our compassionate Somerville bankruptcy lawyers at Lyons & Associates, P.C. can help you move toward a better and more secure financial future. Call us today at 908-575-9777 or contact us online to schedule a free consultation. Our offices are located in Somerville, Morristown, and Freehold, New Jersey, and we serve clients in Somerset, Woodbridge, Morristown, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, Morris Plains, and Monmouth County.