Bankruptcy stops credit card payments and erases or restructures the debt, but it damages your credit score for years and costs money upfront

Bankruptcy is a legal process where you ask a court to either erase your debts or create a repayment plan. For credit card debt specifically, Chapter 7 bankruptcy can wipe out what you owe entirely, while Chapter 13 bankruptcy sets up a three- to five-year payment schedule. You do not stop paying credit card companies directly — instead, the court takes over and tells them what they will receive. The process costs between $300 and $4,000 in filing fees and attorney fees, takes three to six months for Chapter 7 or three to five years for Chapter 13, and stays on your credit report for seven to ten years.

Most people file bankruptcy because credit card debt has grown faster than they can pay it down, medical bills have piled up, or job loss has made minimum payments impossible. Bankruptcy is a legal reset, not a quick fix — it is designed for people who cannot pay their debts even if they tried, not for people who want to avoid paying them.

Key Takeaways

  • Chapter 7 bankruptcy erases credit card debt but requires you to pass a means test showing your income is below your state's median, and you may lose non-exempt assets.
  • Chapter 13 bankruptcy lets you keep your assets but requires a court-approved repayment plan over three to five years, during which you cannot take on new debt.
  • Filing costs $300 to $4,000 in court fees and attorney fees, and you must complete credit counseling before and after filing.
  • Your credit score drops 130 to 200 points when ready, and the bankruptcy remains visible to lenders for seven to ten years.
  • You can file without an attorney, but most people hire one because the paperwork is complex and mistakes can result in dismissal.

Chapter 7 bankruptcy erases credit card debt but has strict income limits

Chapter 7 is the bankruptcy type that wipes out credit card debt completely. You file paperwork with the federal bankruptcy court in your district, list all your debts and assets, and a court-appointed trustee sells any non-exempt property to pay creditors. After that, any remaining credit card debt is discharged — the credit card company cannot pursue you for it. The entire process usually takes three to four months.

To file Chapter 7, you must pass the means test, which compares your household income to your state's median income for a family your size. If your income is below the median, you pass automatically. If your income is above the median, the court calculates your disposable income — what is left after allowed living expenses — and if that number is low enough, you still pass. The point of the means test is to prevent high-income earners from using Chapter 7 to avoid paying debts they could afford.

Chapter 7 also requires you to surrender any non-exempt assets. Exempt assets vary by state but typically include your primary home (up to a certain equity amount), your car (up to a certain value), retirement accounts, and basic household items. If you own a second home, investment property, or a car worth more than your state's exemption limit, the trustee can sell it. Most people filing Chapter 7 have few assets, so this does not affect them.

Chapter 13 bankruptcy restructures credit card debt into a repayment plan

Chapter 13 is used when you have a steady income but cannot pay your debts in full. Instead of erasing the debt, the court approves a repayment plan lasting three to five years. You make one monthly payment to a court-appointed trustee, who distributes it to your creditors according to the plan. Credit card debt is usually treated as unsecured debt, meaning it is paid after secured debts (like a mortgage or car loan) and priority debts (like child support or taxes). You may end up paying back only a portion of what you owe.

Chapter 13 does not require you to pass a means test, so it is available to higher-income earners. It also lets you keep all your assets — the trustee does not sell anything. However, you must stick to the repayment plan for the full three to five years. If you miss payments or your income drops significantly, the court can dismiss the case and send you back to owing the full debt.

Chapter 13 also lets you catch up on missed mortgage or car payments through the plan, which is why some people use it specifically to avoid foreclosure or repossession while dealing with credit card debt at the same time.

The bankruptcy filing process and what paperwork you need

Filing bankruptcy requires you to complete several forms and submit them to the federal bankruptcy court in your district. The main document is the petition, which lists your personal information, all debts, all assets, income, expenses, and the reason for filing. You also file a schedule of assets and liabilities, a schedule of income and expenses, and a statement of financial affairs. These forms are detailed and require exact numbers — estimates or guesses can result in the case being dismissed.

Before you file, you must complete a credit counseling course from an agency approved by the U.S. Trustee Program. This course costs $50 to $100, takes one to two hours, and covers budgeting and alternatives to bankruptcy. After you file, you must complete a financial management course, which costs another $50 to $100. Both are required — skipping either one can result in dismissal.

You can file without an attorney, but the paperwork is complex and mistakes are common. If you make an error on the forms, the court can dismiss your case, and you will have to start over and pay filing fees again. Most people hire a bankruptcy attorney, which costs $1,000 to $3,000 for Chapter 7 or $2,000 to $4,000 for Chapter 13. Some attorneys offer payment plans so you can pay the fee over time.

How bankruptcy affects your credit score and future borrowing

Bankruptcy damages your credit score when ready. A Chapter 7 filing typically drops your score by 130 to 200 points, depending on where you started. A Chapter 13 filing has a slightly smaller impact because you are repaying some debt, but the drop is still 100 to 150 points. If your score was 700 before filing, it may drop to 500 to 570.

The bankruptcy stays on your credit report for seven years if you file Chapter 7, or ten years if you file Chapter 13. During that time, lenders can see it and often decline your process for new credit. After the bankruptcy is removed from your report, the damage fades, but it does not disappear when ready — lenders may still consider it for several years after removal.

You can rebuild your credit after bankruptcy by getting a secured credit card (which requires a cash deposit), making all payments on time, and keeping your credit utilization low. Many people see their score recover to 650 to 700 within two to three years of discharge, though it takes longer to reach pre-bankruptcy levels. Some lenders specialize in post-bankruptcy credit and may approve you sooner than traditional banks.

What happens to your credit cards after bankruptcy is discharged

Once your bankruptcy is discharged, your credit card accounts are closed and the debt is gone. You cannot use those cards anymore — the credit card company will not let you, and the account will show as closed on your credit report. The credit card company also cannot pursue you for the debt through collection calls, lawsuits, or wage garnishment.

Some credit card companies may reopen accounts or offer you a new card after discharge, but this is rare in the first year or two. More commonly, you will need to explore for a new card, and you will likely may have access to only for a secured card or a card with a high interest rate and low credit limit. This is normal and expected — lenders view you as higher risk after bankruptcy.

If you had a co-signer on any credit card accounts, the discharge does not protect them. The credit card company can still pursue the co-signer for the full debt. This is one reason people sometimes file bankruptcy jointly with a spouse — to protect both of you.

Alternatives to bankruptcy for credit card debt

Bankruptcy is not the only option for managing credit card debt. Debt consolidation combines multiple credit card balances into a single loan with a lower interest rate, which can reduce your monthly payment and help you pay off the debt faster. Debt settlement involves negotiating with your credit card company to pay a lump sum that is less than what you owe, though this damages your credit and may have tax consequences. Credit counseling through a nonprofit agency can help you create a budget and contact your creditors to negotiate lower interest rates or payment plans.

A debt management plan is similar to credit counseling but more formal — the counseling agency contacts your creditors on your behalf and negotiates a plan where you make one monthly payment to the agency, which distributes it to your creditors. This does not erase debt like bankruptcy does, but it can reduce your interest rate and help you pay off the debt in three to five years without filing.

These alternatives are worth exploring before bankruptcy because they do less damage to your credit score and do not stay on your report as long. However, they require you to have some income and the ability to make payments, whereas bankruptcy is available even if you have no income at all.

Frequently Asked Questions

Can I file bankruptcy if I have a mortgage or car loan?

Yes. Bankruptcy handles all your debts, not just credit cards. In Chapter 7, you can keep your home and car if you are current on payments and the equity is below your state's exemption limit. In Chapter 13, you can catch up on missed mortgage or car payments through the repayment plan, which is why some people use it to avoid foreclosure or repossession.

Will bankruptcy stop collection calls and lawsuits?

Yes. Once you file, an automatic stay goes into effect, which stops creditors from calling, suing, or garnishing your wages. The credit card company must stop collection efforts when ready. If they continue after being notified of the bankruptcy, they can be fined.

Can I file bankruptcy more than once?

Yes, but there are waiting periods. You must wait eight years between Chapter 7 filings, four years between Chapter 13 filings, and six years if you file Chapter 7 after Chapter 13. These rules prevent people from using bankruptcy repeatedly to avoid paying debts.

What happens if I file bankruptcy while I still owe money to the IRS?

Tax debt is treated differently than credit card debt. Recent tax debt cannot be discharged in bankruptcy, but older tax debt (generally more than three years old) may be. The bankruptcy trustee will review your tax situation and determine what is discharged and what remains your responsibility.

Do I have to tell my employer that I filed bankruptcy?

No. Bankruptcy is a private legal matter, and employers cannot legally ask about it or fire you because of it. However, if your employer runs a credit check for a security clearance or certain positions, they may see it. Most private employers do not run credit checks.