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Should You File for Bankruptcy for Credit Card Debt?
by
JG Wentworth
•
September 16, 2024
•
8 min
Given that credit card debt is smashing records in the U.S., it’s very likely that many Americans are wondering if filing for bankruptcy is the answer to escaping their overwhelming balances. Between the constant phone calls from collectors, the stress of trying to keep up with minimum payments, and the anxiety over how this debt will impact your long-term financial health, it’s a reasonable question.
But is filing for bankruptcy the right solution for credit card debt? It’s a big decision that comes with long-lasting consequences, both positive and negative. In this article, we’ll explore the pros and cons of using bankruptcy to tackle credit card debt so you can decide if it’s the best path forward for your unique situation.
Understanding credit card debt and bankruptcy
Credit card debt is considered an “unsecured” form of debt, meaning it’s not backed by any collateral like a house or a car. Lenders take on more risk with unsecured debt, which is why credit card interest rates are often much higher than other types of loans.
When it comes to bankruptcy, there are a few different chapters you can file under, but the two most common for individuals are:
- Chapter 7: Also known as “liquidation” bankruptcy, this allows you to have many of your debts, including credit card balances, discharged or wiped out completely. However, you may have to sell off certain assets to pay back creditors.
- Chapter 13: This is a form of “reorganization” bankruptcy where you work with the court to develop a 3-5 year repayment plan. During this time, your creditors are prevented from contacting you or trying to collect.
The Pros
Let’s take a look at some of the potential upsides of using bankruptcy to tackle your credit card debt:
- A fresh financial start: Perhaps the biggest draw of bankruptcy is the opportunity to wipe the slate clean and get a fresh start. Once your debts are discharged, you no longer have to worry about collection calls or making those monthly payments.
- Immediate debt relief: Filing for bankruptcy triggers an “automatic stay” that immediately stops all collection efforts against you. This provides instant relief from the constant stress and harassment of dealing with creditors.
- Protecting assets: Depending on the bankruptcy chapter you file under and the exemptions available in your state, you may be able to protect certain assets like your home, car, or retirement accounts from being seized to pay back creditors.
- Improved cash flow: Without those burdensome credit card payments each month, you’ll have more breathing room in your budget to cover essential expenses and start rebuilding your financial foundation.
- Time to recover: Bankruptcy stays on your credit report for 7-10 years, but the impact lessens over time. Many people can begin reestablishing their credit and getting back on track within a few years post-bankruptcy.
The Cons
Of course, bankruptcy isn’t all sunshine and rainbows. There are some significant downsides to consider as well:
- Damage to your credit: Bankruptcy will severely impact your credit score, making it much harder to qualify for loans, credit cards, housing, and even some jobs in the future. This can last for years.
- Limiting future borrowing: After bankruptcy, you may only qualify for subprime credit cards and loans with high interest rates. This can make it challenging to rebuild your credit and finance major purchases down the road.
- Loss of assets: Depending on the bankruptcy chapter and your state’s exemptions, you may have to part with valuable assets like your home, car, or retirement savings to pay back creditors.
- Long-term consequences: Bankruptcy can haunt you for a very long time. It may be more difficult to rent an apartment, get approved for a mortgage, or even land certain jobs due to the bankruptcy on your record.
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Alternatives to bankruptcy for credit card debt
Before you make the choice to file for bankruptcy, it’s important to explore other options that may be able to provide relief without the severe long-term impact:
- Debt relief plans: These programs allow you to negotiate with creditors for lower interest rates and monthly payments. You make a single monthly payment to the management plan, which then distributes the funds to your creditors.
- Debt consolidation loans: By taking out a new loan to pay off multiple credit card balances, you can potentially score a lower interest rate and simplified monthly payments.
- Balance transfer cards: Some credit cards offer promotional 0% APR periods on balance transfers, allowing you to pay down the debt interest-free for a set timeframe.
The bottom line
Deciding whether to file for bankruptcy to address credit card debt is a major life decision that shouldn’t be made lightly. It’s critical to carefully weigh the potential benefits against the long-term consequences.
In some cases, bankruptcy may truly be the best path forward – for example, if you’re facing overwhelming, uncollectible medical debt or have no other viable options to get out from under crushing credit card balances. But for many others, exploring alternative debt relief solutions first may be the smarter play.
Ultimately, you know your own financial situation and goals better than anyone. With the right strategy and perseverance, you can overcome even the heaviest burden of credit card debt.
There’s always JG Wentworth…
Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
SOURCES CITED
Dickler, J., “Credit card debt hits record $1.14 trillion, New York Fed research shows.” CNBC. August 6, 2024.
About the author
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.
