Using Chapter 13 for Relief From Credit Card Debt
Crushing debt from credit card charges can feel inescapable. Minimum payments barely make a dent, and the stress of looming balances can be paralyzing. If you’ve explored other options and are still overwhelmed, Chapter 13 might be a path to financial freedom. Here is a primer on how this form of bankruptcy treats credit card debt, its impact on your credit score and the ultimate effect on your financial status.
Unlike a Chapter 7 bankruptcy, Chapter 13 is a debt reorganization plan. You propose a schedule, typically lasting three or five years, whereby all your disposable income (after basic living expenses) goes towards paying off creditors. This offers a chance to catch up on missed payments and potentially eliminate a significant portion of your debt.
Chapter 13 treats credit card debt according to rules of priority. Debts fall into categories based on degree of entitlement to repayment. Secured debts, such as mortgages or car loans with collateral, have the highest priority. This means you must pay them in full to keep the secured property. Priority unsecured debts, like tax liens or child support, come next. Last come unsecured debts like credit cards.
Because unsecured debts are low priority, they are paid only if funds remain after secured and priority debts are addressed. This often translates to paying only a fraction of the total credit card balance. In some cases, depending on your income and the length of your plan, you might not even pay anything towards them.
At the end of the plan’s term, any remaining unsecured debts are discharged, namely, forgiven. Let’s say you owe $30,000 on credit cards. Your three-year Chapter 13 plan allocates all available funds after secured and priority debts to these overdue balances. After three years, you’ve managed to pay $10,000. The remaining $20,000 may be discharged, meaning you no longer legally owe it.
Filing for Chapter 13 bankruptcy will negatively affect your credit score. A Chapter 13 typically stays on your credit report for seven years, potentially lowering your score by significant points. However, the impact lessens over time, especially if you manage your credit responsibly after the discharge. Making consistent, on-time payments for other debts and credit lines can rebuild your credit score more quickly.
If you’re overwhelmed by credit card debt and have a steady income, can offer a structured path to financial freedom. Talking to a Chapter 13 bankruptcy attorney can help you weigh the pros and cons and determine if this form of bankruptcy is the right strategy for your situation.
The Law Offices of Michael Jay Berger in Beverly Hills, California will reliably advise you on your repayment plan and guide you through a Chapter 13 proceeding. Call 310-271-6223 or contact us online to schedule a free consultation.
