will bankruptcy be the answer?
Different Bankruptcy Chapters
LIquidation, or straight, bankruptcy is what Chapter 7 is called. That is to wipe out debts. You get a discharge, which, in effect, takes your name off the note or contract.
Americans now owe $1 trillion in credit card debt, with an average monthly balance of about $9,600 for borrowers who don’t pay their cards in full each month.
Well, it says here, a lot of that will not be repaid.
Credit card debt is easily dischargeable, as the creditor would have to prove you committed a fraud in obtaining or using the card to have the debt excepted from discharge.
A credit card company would have to hire a lawyer, pay the $293 filing fee, and win the lawsuit in the bankruptcy court.
If you have non-exempt assets, the Chapter 7 trustee will be getting those, and selling them for the benefit of creditors.
But, the main reason credit card companies rarely file adversary proceedings, as lawsuits in bankruptcy court are known, is, they sell that debt as soon as they get the notice that you filed bankruptcy.
So, you have a visa and a mastercard, or, more commonly, multiple visas and mastercards.
They get the notice of you filing Chapter 7 bankruptcy, and, pursuant to what are called forward flow agreements, they sell that debt to a zombie debt buyer for pennies on the dollar. The credit card company closes out their file and writes off the balance.
The debt buyer files a claim in the bankruptcy court, hoping to collect 2 cents on the dollar if it paid 1.5 cents for the debt.
This does not leave them any room to hire lawyers and file lawsuits arguing you committed fraud while incurring the balance.
Chapter 13 bankruptcy and credit card debt
Americans have been eking out their monthly minimum credit card payments from deep inside the 21st century debt trap. Defaults remain well below the 6.8 percent high reached during the Great Recession, but have edged up recently to 2.3 percent.
Personal finance experts recommend borrowers with a hefty balance shop around for zero-percent-interest balance transfer offers. Look for fees of 3 percent or less, and terms of 18 months or more.
You may be in a position where you cannot pay all your credit card debt, but, cannot succeed in a Chapter 7 bankruptcy because your income is too high, or you do have money left each month after paying your living expenses. Just not enough to cover all the credit cards.
Say you have $200 a month left, before paying debts, but after paying living expenses.
That would be your payment in a Chapter 13 case. It would last 3 to 5 years, depending on your income for the 6 complete months before you file bankruptcy.
So, even in a 5 year (60 month case), $200 times 60 = $18,000. If you owe $18,000 or more in credit card debt, you still save money, because filing Chapter 13 stops the interest.
This example ignores your other debts and assets, which may change the analysis.
Rising interest rates push more people over that tipping point, where even making the monthly minimum payments on all the credit cards leaves you with higher balances at the end of the year.