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Credit Card Debt and Personal Loans

Man Using Credit Card for Online Purchase

When you hear the word “bankruptcy,” what is the first thought that comes to mind?  Credit cards! And, in many cases, that is what has triggered a financial crisis. But credit cards in the 21st century are used for all types of underlying debts, such as medical, groceries, utilities, car repairs- you name it. Therefore, having credit card debt really doesn’t mean that someone is out charging a lot of unnecessary expenses, which is a common perception.

Credit card debt is everywhere. What makes using credit cards so convenient is also what can lead to serious financial problems. Specifically, with a credit card, you have instant access to money and an automatically built-in repayment plan with very low and affordable monthly payments. 

That is, until you have too high of a balance or several credit cards at once. People can use credit cards easily and affordably for years until all of a sudden, they hit a wall- the payments go through the roof, outrageous interest rates kick in and the next thing you know, you are drowning in huge monthly payments, with no further credit to tap.

Personal loans are also extremely popular with consumers. Banks, credit unions, and many private lenders just love to give them out to people who they deem likely to be able to make monthly payments. It is normally very easy, quick, and painless to get a personal loan or a new credit card.  Just a few clicks and there you have it. 

There isn’t anything inherently bad about personal loans and, in fact, they do make a lot more sense than credit cards because they typically have a lower rate of interest. Many personal loans just require that you make an interest-only monthly payment. How easy and affordable is that?

When Credit Cards and Personal Loans Become a Problem

It is frequently really hard to tell when you have too much credit card or personal loan debt.  After all, you are able to make the monthly payments without a problem. Well, that is until you start to struggle, slowly but surely. 

Most people spend months, and sometimes years and decades struggling with these types of debts. They keep thinking that they will dig themselves out of debt and most people succeed, but at a high cost. Yet, there comes a time when you find yourself charging on credit cards or personal lines of credit just for daily existence. 

While this may be a temporary problem for many people due to unemployment, underemployment, medical leave, etc., there does come a point where enough is enough.  It’s at that moment that you realize that you’ll never be able to pay off these credit cards or personal loans during your lifetime! 

Yet, even when you realize that you’re in this situation, every month, you struggle and somehow rob “Peter to pay Paul.” It’s an endless downward cycle, leading to anxiety, stress, depression, bill collectors, lawsuits, and garnishments, if not worse.

Bankruptcy is never anyone’s first choice to resolve their financial problems but when things are getting out of control and you can barely keep up on your payments (or you are already there), then getting advice from a good bankruptcy attorney is definitely something to seriously consider. Again, the words bankruptcy and credit cards go hand in hand for a lot of people.

Help is quickly available and filing bankruptcy to wipe out an overwhelming amount of credit card or personal loan debt is often the best decision to make for a long-term and permanent financial solution.

Filing Bankruptcy for Credit Card Debt and Personal Loan

Chapter 7 Bankruptcy

Credit cards and personal loans are almost always wiped out in a Chapter 7 bankruptcy. With very few exceptions, Chapter 7 bankruptcy just works and works well to discharge these unsecured debts, whether they are personal loans or credit cards. Chapter 7 can happen very quickly for fast protection and relief. Lawsuits stop. Collection calls stop. Garnishments stop in their track (and sometimes you can get some of those wages or deposits back). If you qualify for a Chapter 7 bankruptcy (which has a lot to do with your current income and the assets that you own or have equity in) then filing bankruptcy on your credit cards (along with other debts) is definitely something to look into.

Chapter 13 Bankruptcy

Chapter 13 is another great way to wipe out or discharge your credit cards and personal loans. Think of a Chapter 13 bankruptcy as a slow-motion Chapter 7. Both Chapter 7 and Chapter 13 get to the same destination- a bankruptcy discharge. That’s the goal.  Yet, for a whole bunch of reasons, Chapter 13 is the best (or only) option for some people that are sinking further and further into debt. Chapter 13 is just as effective as Chapter 7 in wiping out credit card debts and personal loans.

The difference between the two bankruptcies is really about how you achieve your goal of not only getting out of unbearable debt but creating a stable financial future. If you make just a little bit too much income to qualify for a Chapter 7, then Chapter 13 gives you an opportunity to pay just a percentage of your debt back (based on your ability and some other factors). It is not uncommon to see payback plans in the 1% to 20% range.

Every case is different, and the calculations are complicated unless you have the legal experience and knowledge for the state in which you live in. That’s why it is always important to get advice and representation from a local bankruptcy attorney.  Avoid the regional and national firms. These large firms simply cannot match the expertise of a bankruptcy attorney in Nebraska or Iowa.

Credit Card and Personal Loan FAQs

No! If a credit card is only in your spouse’s name, then you 'e not legally responsible for the debt. Additionally, being an “authorized user” on your spouse’s credit card does not make you responsible for the debt. As a general rule, the name(s) on the monthly statement indicates who the legally responsible party(s) is.

Yes, a Chapter 7 bankruptcy does wipe out credit card debt.

Usually not, but it is possible if the creditor is willing to do so. There is no law requiring that the card be closed but that’s is what normally happens. Yet, if there is some special reason why you would want to keep a particular card, you could reach out to the creditor (through your attorney) and request a “reaffirmation agreement.” This is normally not a smart thing to do (nor must the creditor agree) as it is much easier and cheaper to obtain a new credit card (perhaps a secured one) post-bankruptcy.

That depends. If you need to file bankruptcy (if it’s just a matter of time), then stop paying the credit cards. However, if you can’t afford the credit cards but believe that you somehow will avoid bankruptcy and settle the debts, then stop paying the credit cards. Yet, your credit will be severely damaged by not paying them and it would be better for your credit if you were to just file bankruptcy (as opposed to not paying your credit cards for a long time- and then file bankruptcy).

No, technically not. Everyone filing bankruptcy must list all their debts. However, in a Chapter 7 bankruptcy especially, you can voluntarily choose to pay back certain debts once you file. So, for example, if you want to keep your house and car, you would just continue to make those payments, even though they are included in the bankruptcy.

Immediately. Once you realize that you cannot afford to pay back your credit cards. Using someone else’s money and knowing that you can’t pay back the debt is fraudulent and can and does give a creditor just cause to object to your bankruptcy. Avoid incurring any debt if bankruptcy is contemplated. Seek the advice of a bankruptcy attorney to learn what options are available. In the end, you’ll be glad you did. Unfortunately, some professionals that do not practice bankruptcy law give out really bad advice, and there are horror stories of a very few attorneys telling clients that it is OK to run up their credit cards. Do not take that advice!

Absolutely not! That is a very bad idea, even if it is somewhat of folklore. Maxing out your credit cards before filing bankruptcy is fraudulent and leads to very bad Karma. It is so much better to just deal with the debt problem before you go down that dark road.

Probably very bad things, but not always. If you have a job with wages, you could have your wages garnished. If you have a bank account, that too could be garnished. If you own real estate, a lien could be placed on it and ultimately sold off. Your future credit likely will be terrible for at least 10 years, and sometimes forever. On the other hand, if you are “off the grid,” so to speak, living in an apartment or in someone else’s home and are on social security or disability of some sort, then you may never need to file bankruptcy. However, if you have some assets, like a 401(k), for example, you could receive a 1099-C cancellation of debt, and be subject to income tax.

Over time, they may, on one way or another.  If they don’t sue you within 5 years in Nebraska (and you haven’t made payments in that period of time or admitted to owing the debt), then the Statute of Limitations would be an affirmative defense and they likely wouldn’t sue you.  Time heals most financial wounds, but it takes a very long time.

Just stop paying. You aren’t “legally” required to pay your credit cards in a criminal sense. So, it isn’t “illegal” to not pay a credit card, in general.  However, if you incurred a credit card debt and knew that you couldn’t pay it back per the terms of the card, then that is potentially a criminal act if you had the deliberate intention of not paying the same. For the ordinary situation where you can’t afford to pay your credit card bills due to just becoming overwhelmed or life just happens, that is strictly a “civil’ matter.  You could be sued for the debt, but that’s not a criminal act.

Yes, you have every right to directly negotiate a settlement.  Sometimes, it turns out very well. Other times, you can get tricked or misled or make matters much worse.  For example, some people are tricked into making a very small payment (after having not paid for years) but then that resets the Statute of Limitations clock.  If you do negotiate a settlement, make absolutely sure it is in some form of writing with clear terms.  Also, be aware that debt forgiveness is potentially taxable (but is normally not taxable when wiped out in a bankruptcy).