Your Credit Cards and Bankruptcy
When you are facing credit card debt and you cannot pay it, negotiating credit card debt down so it is manageable becomes a top priority. Those facing collections calls, threats of legal action or even wage garnishment because of their past-due credit card balances often turn to bankruptcy as a solution. If you are considering seeking protection under the federal bankruptcy code, it is important that you understand that there is a specific process for how your credit card debt is to be dealt with in bankruptcy, which differs based on what chapter you file.
Chapter 7 bankruptcy is one of the options that you have as a consumer considering filing for bankruptcy protection. Under this chapter of bankruptcy, knowing how to negotiate credit card balances bankruptcy rules isn't an issue and negotiation of debt doesn't really come up. Instead, under a chapter 7 bankruptcy, the law mandates that money in the bankruptcy estate is used to pay off unsecured creditors, like your credit card lenders. Once the money in the bankruptcy estate has been distributed among your creditors, the remaining balance of debt is forgiven. This means no negotiation on your part is involved at all. You file bankruptcy, the money from the estate is distributed, and debts are wiped away by the court automatically by virtue of the way chapter 7 works.
This, of course, leads to the question of what the bankruptcy estate is and where the money in the estate comes from. The answer is that it comes from you. When you file chapter 7, there is a requirement that money you have saved becomes part of the estate and that non-exempt assets are sold and become part of the estate, unless the money and assets are exempt. Exemptions exist for retirement accounts (401Ks, IRAs, etc.) and for home equity and for certain other things like "tools of the trade" used to do business and some inexpensive cars.
Chapter 13 requires a bit more "negotiation" on your part. Chapter 13 is called a wage earners bankruptcy and while you have to make under a certain income to qualify for chapter 7, no such requirement exists for chapter 13. However, chapter 13 does require that you repay at least some of the amount you owe on your credit cards.
The amount you owe is set up based on a repayment plan, which lasts for three to five years. Creditors have to agree with this repayment plan, which is where your negotiating skills may come in handy. However, even here, the law does largely dictate what you end up paying based on percentages of your income as set by the amount of debt you have and the laws in your state. Further, creditors rarely object to a chapter 13 bankruptcy repayment plan, which essentially means you and your attorney come up with an amount that is reasonable to pay based on your disposable income that is almost always the amount that you are going to end up having to pay with little to no negotiation required.
Creditor Objection to Discharge
One place where negotiation might become important is if your creditors object to the discharge of your debts. During bankruptcy, something called a "341 meeting" is scheduled where your creditors can attend and can question you about your debts and about your assets. After this meeting, creditors have 60 days to argue that your credit card debt (or other debt) shouldn't be discharged. If a creditor does object to discharge, you and the creditor will have to go to court and argue your points about why the debt should or should not be forgiven. If a creditor wins, the judgment that the debt is not dischargeable will remain with the debt forever. Your only option is to appeal to avoid this.
When a creditor files objection to discharge, especially if the creditor wins and the debtor is thinking about appealing, it is very common for the parties to seek a settlement on the issue instead of continuing to battle things out in court. This will involve a meeting between creditor and debtor where the two parties negotiate an amount that is reasonable to be paid based on what is owed and the resources available to the debtor. At this meeting, it is important to have clear proof of your income so that a creditor can see exactly what you'll be able to pay and so they will be more likely to be reasonable about coming up with a settlement you can actually afford.
References and Resources
- Image credit: Morguefile/nacu/morgueFile Free License
- US Bankruptcy Code Chapter 13, Cornell University Law School
- US Bankruptcy Code Chapter 7, Cornell University Law School