Credit Card Bankruptcy Tips and Resources For Consumers
Debtors often file credit card bankruptcy when debt levels exceed $10,000. In previous years, consumers entered into Chapter 7 to eliminate credit card debts. After the Bankruptcy Abuse Prevention and Consumer Protect Act (BAPCPA) went into effect in 2005, the majority of petitioners were required to file Chapter 13 bankruptcy to repay creditor debts through a prearranged payment plan.
Since BAPCPA, credit card bankruptcy filings have declined an average of 4-percent per year. According to the National Foundation for Credit Counseling, “misuse of credit cards is the cause of approximately one-third of personal bankruptcy petitions.” The remaining petitions typically stem from an attempt to stop foreclosure or eliminate medical debts.
BAPCPA was initiated to reduce the number of bankruptcy petitions from consumers engaging in frivolous spending habits. Unfortunately, obtaining debt relief through bankruptcy has become much more complicated and costly. Debtors are now required to submit a Chapter 13 payment plan to the bankruptcy judge. Chapter 13 payments typically extend for 2 to 3 years and often amount to as much as 60-percent of debtors’ disposable income.
The amount of debt to be repaid is derived through the ‘means’ test. This tool compares petitioners’ income against their states’ median income levels. Those earning equal to or greater than median levels are required to enter into Chapter 13, while those who earn less can seek credit card debt relief through Chapter 7.
Chapter 13 payments are submitted to the bankruptcy Trustee, who in turn distributes payments to creditors until debts are repaid. During the repayment period debtors are prohibited from taking on new debt unless approved through the court. When debtors are incapable of adhering to their payment plan, creditors are given the right to petition the court to have the bankruptcy dismissed. When this occurs, debtors fail out of bankruptcy and creditors can move forward with collection action.
Another stipulation of BAPCPA is petitioners must obtain credit counseling through a U.S. Trustee approved agency. It is important to note that personal bankruptcy can often be avoided by entering into credit counseling and learning how to better manage personal finances.
BAPCPA allows debtors to obtain credit counseling up to six months prior to submitting a bankruptcy petition. It is a good idea to work with an approved agency from the start. If credit counseling does not resolve the problem, debtors will have met the BAPCPA requirements and will not have to enter into credit counseling a second time.
Chapter 13 payments can cause substantial harm to debtors. In addition to the financial challenges, bankruptcy wreaks havoc on credit scores and remains on credit reports for up to 7 years. Debtors can witness a FICO score reduction of 100 points or more, which often places them into the high-risk credit category and can prohibit the ability to obtain credit of any kind for years to come.
Consumers considering filing credit card bankruptcy would be wise to research available bankruptcy alternatives including credit counseling, debt consolidation, and debt settlement. Debtors who enlist help from debt reduction companies must conduct due diligence to determine the actual costs involved.
Debt settlement companies normally charge a start-up and monthly fee which can amount to nearly the same as negotiated debts. Debt consolidation is typically reserved for homeowners with accrued home equity. Debtors take out a second loan using their home as collateral. This option can place real estate at risk for foreclosure if borrowers default on their home equity loan payments.
One trusted source for debtors who need help managing credit card debt is The National Foundation for Credit Counseling website at NFCC.org. Debtors can learn the advantages and disadvantages of filing bankruptcy to reduce credit card debt; locate nationwide credit counselors and housing counselors; and learn foreclosure prevention strategies.
Author Bio: Learn more about credit card bankruptcy from real estate investor and author, Simon Volkov. His website presents a comprehensive personal finance article library to help visitors learn money management skills and locate helpful financial resources. Learn more at www.SimonVolkov.com.
Category: Finances
Keywords: credit card bankruptcy, fail out of bankruptcy, chapter 13 payments, bankruptcy alternatives
