Credit Card Bankruptcy: Rules of Bankruptcy Abuse Prevention and Consumer Protection Act
Author: Simon Volkov
Credit card bankruptcy filings are on the decline with nearly a 4-percent decrease this year. The National Foundation for Credit Counseling states credit card misuse is responsible for about one-third of all personal bankruptcy petitions. The remainder of bankruptcies occurs due to medical debts and home mortgages.
Previously, filing credit card bankruptcy was the preferred method for eliminating debts. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect to stave off unwarranted bankruptcy petitions from consumers who engaged in reckless spending. Today, it has become considerably more challenging to obtain debt relief.
BAPCPA requires debtors to repay a portion of their debts under Chapter 13. Additionally, petitioners must obtain credit counseling through a U.S. Trustee approved agency. Once debtors file a bankruptcy petition they must attend a 341 creditor meeting.
Creditor meetings take place within 30 days of fili ng for bankruptcy protection. Debtors can meet with creditors to explain their situation and work out a payment plan. Chapter 13 payment plans are submitted to the bankruptcy judge for review. Judges can approve, deny, or request changes to the payment plan.
After Chapter 13 payments are approved, debtors are required to submit payments to a Trustee who distributes payments to creditors until debts are repaid. Chapter 13 plans can last between two and five years. Much depends on the amount of outstanding debt.
Bankruptcy payment plans can cause serious financial hardship to debtors. In addition to paying normal expenses, debtors must adhere to Chapter 13 plans or run the risk of failing out of bankruptcy. When debtors do not abide by their plan, creditors can petition the court seeking dismissal of the bankruptcy petition. If this occurs, debtors lose protection from the court and creditors can commence with collection action.
Bankruptcy is reflected poorly on debtors' credit reports and remains in place for ten years. The negative impact can make it difficult for consumers to qualify for any type of credit. Individuals who file credit card bankruptcy will find it challenging to obtain credit card approval for a minimum of two years. Filing bankruptcy can cause credit scores to drop by 100 points or more and require several years to repair the damage.
Debtors who are considering filing credit card bankruptcy should investigate bankruptcy alternatives such as budgeting, credit counseling, debt management, debt consolidation or debt settlement.
It is crucial to engage in due diligence when using debt reduction companies claiming they can settle credit card debt for pennies on the dollar. Most debt settlement companies charge startup and monthly fees to negotiate creditor debts. Payment plans often last for two or more years.
Consumers who require help managing credit card debt or deciding if personal bankruptcy is the best option should visit the National Foundation for Credit Counseling website at NFCC.org. It is important to understand the advantages and disadvantages of credit card bankruptcy. This option should only be used as a last resort. Afterward, debtors should engage in credit repair strategies by paying bills on time and in full each month.
