What Happens To Credit Cards in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is often a route for those who find themselves buried under credit card debt. Since credit cards are often a low priority on the repayment schedule, much of this debt can be discharged. However, if credit card debt is your primary debt, it may require partial repayment. 

One of the most common reasons individuals find themselves facing bankruptcy is due to credit card debt. Although Arkansas residents carry less than the national average ($5,327 compared to $6,194 per person), that debt can add up fast with interest and spiral quickly into an insurmountable amount. For those reaching high five or six-figure credit card debt, Chapter 13 bankruptcy is often considered a viable option to clear that debt, but how exactly does it work?

Chapter 13 Bankruptcy and Credit Card Debt

Chapter 13 is a reorganization bankruptcy. What this means is that you work with your bankruptcy attorney to develop a repayment plan that makes regular payments to your creditors over three to five years. Credit card debt typically is the lowest priority in a bankruptcy plan.

Credit card debt is typically general unsecured debt, meaning that it falls to the bottom of the priority list for repaid debts. Usually, Chapter 13 plans will propose to pay a “pro rata” distribution to unsecured debts. These creditors split up the amount remaining after the other creditors are paid. In many cases, the amount these unsecured creditors receive is almost nothing. However, it’s worth noting that some credit cards are secured (such as credit rebuilding cards). These secured credit cards are like other secured debt and must be paid in the plan at a higher priority.

How Much Credit Card Debt Can Be Paid in Chapter 13

With a Chapter 13 plan, you’ll list all of your creditors, classifying them into categories based on whether the debt owed to them is secured, priority (generally taxes, child support, or alimony), or general unsecured debt. Your Chapter 13 plan payment amount depends on several factors, including the secured debts you intend on paying back, your household income for the six months before filing the bankruptcy case, and what you expect your income to be going forward. If your proposed monthly budget shows that you can afford to pay a portion of your unsecured debt (such as credit card debt) after your secured debts and any priority debts are paid, then the court will require that you pay some portion of those unsecured debts.

Of course, as soon as you formally file for any type of individual bankruptcy, your credit cards will be frozen, and you likely will not be able to qualify for any type of loan until your repayment is made. Only after that can the process of credit rebuilding and recovery begin.

If you’re overwhelmed by credit card debt and are considering personal bankruptcy, call the team at Natural State Law, PLLC today. We understand the bankruptcy process and have advised hundreds of Arkansas residents through Chapter 13. Call (501) 916-2878 to learn more.