Credit card debt is dealt with in a bankruptcy case pursuant to the provisions of the U.S. Bankruptcy Code. Consumers seek bankruptcy relief in two different ways. A Chapter 7 bankruptcy permits a consumer to liquidate his debt. A Chapter 13 bankruptcy grants a consumer the ability to pay off debt through a court-supervised repayment plan.
Chapter 7 Bankruptcy
Historically, upwards of 70 percent of all consumers seeking bankruptcy relief filed a Chapter 7 bankruptcy case, according to the American Bankruptcy Institute. Consumers filed Chapter 7 bankruptcy cases because the U.S. Bankruptcy Code permitted discharge of the debtor's obligations to creditors. Credit card debt was included in debt discharged in a Chapter 7 case. But beginning in 2005, Congress and the President amended the U.S. Bankruptcy Code to significantly limit the number of consumers who qualify for a discharge of credit card debt pursuant to Chapter 7.
The constriction of the ability of a consumer to discharge credit card debt is accomplished in part through a means test incorporated into Chapter 7 of the U.S. Bankruptcy Code. The means test applied by the U.S. Bankruptcy Court precludes most debtors from filing a Chapter 7 bankruptcy if their household income exceeds the state's median income. There is a different median income in each state. Debtors with household income above the state's median level file Chapter 13 bankruptcies in most cases. The net effect is that consumers are left paying off a higher percentage of credit card debt rather than having that obligation discharged.
Prior to filing for bankruptcy, a consumer must participate in court-approved credit counseling, pursuant to the U.S. Bankruptcy Code. A focus of credit counseling and education in most cases is credit card debt. An element of this step in the bankruptcy process is determining whether there is a way to resolve credit card debt obligations short of actually proceeding further with bankruptcy. With this new credit counseling and education step in the bankruptcy process, some consumers negotiate credit card debt repayment plans short of an official bankruptcy filing.