Filing Bankruptcy to Handle Credit Card Debt: What Actually Happens
Bankruptcy stops credit card collection calls and freezes what you owe, but it damages your credit for years and costs money upfront
Bankruptcy is a legal process where a court either erases some or all of your debts, or creates a repayment plan you follow for three to five years. For credit card debt specifically, bankruptcy can stop collection calls immediately, prevent wage garnishment, and in many cases wipe out what you owe entirely. The tradeoff is real: bankruptcy stays on your credit report for seven to ten years, makes it harder to rent or borrow, and requires court fees and often a lawyer.
The two types that handle credit card debt are Chapter 7 and Chapter 13. Chapter 7 erases unsecured debts like credit cards but requires you to pass an income test and may mean selling assets. Chapter 13 lets you keep your assets but puts you on a three- to five-year payment plan where you pay back a portion of what you owe. Which one applies to you depends on your income, how much debt you have, and whether you own a home or car you want to keep.
Key Takeaways
- Chapter 7 bankruptcy can erase credit card debt entirely if your income is low enough, but Chapter 13 creates a repayment plan if your income is too high for Chapter 7.
- Filing costs between $300 and $400 in court fees alone, plus lawyer fees that typically range from $1,000 to $3,000 for Chapter 7 and $2,500 to $6,000 for Chapter 13.
- You must complete credit counseling before filing and a financial management course after, both of which are required by federal law.
- Bankruptcy stops collection calls and lawsuits immediately through something called an automatic stay, which is a court order that freezes most collection activity the moment you file.
- The damage to your credit score is severe at first but gradually improves; after three to four years, you may be able to borrow again, though at higher interest rates.
Chapter 7 versus Chapter 13: Which one applies to you
Chapter 7 bankruptcy erases most unsecured debts, including credit cards, medical bills, and personal loans. You do not repay anything. The catch is the means test: your household income must fall below the median income for your state. If it does, you can file Chapter 7. If it does not, you are pushed into Chapter 13 instead.
Chapter 13 bankruptcy is for people whose income is too high for Chapter 7. Instead of erasing debt, it creates a repayment plan lasting three to five years. You pay a portion of what you owe—sometimes as little as pennies on the dollar—while the rest is forgiven at the end. You keep your house and car as long as you stick to the plan. The downside is that you are making payments for years, and if you miss even one payment, the plan can be dismissed and creditors can resume collection.
To know which applies to you, you need to know your household income for the past six months and your state's median income threshold. The U.S. Courts website publishes these thresholds by state and family size. If you are unsure, a bankruptcy lawyer can tell you in one conversation.
The automatic stay: How bankruptcy stops collection immediately
The moment you file bankruptcy, a court order called an automatic stay goes into effect. This order tells creditors to stop all collection activity—no more calls, no more letters, no more lawsuits. If a creditor violates the stay, they can be fined and forced to pay your legal fees.
The automatic stay is one of the most powerful tools in bankruptcy. If you are being sued, the lawsuit pauses. If your wages are being garnished, the garnishment stops. If you are facing eviction or foreclosure, the stay buys you time. However, the stay is not permanent. In Chapter 7, it typically lasts until your case closes, usually three to six months. In Chapter 13, it lasts as long as your repayment plan is active.
One important limit: the automatic stay does not stop child support or alimony collection, tax liens, or criminal proceedings. It also does not stop a landlord's eviction if the eviction was already filed before you filed bankruptcy.
What bankruptcy costs and where the money goes
Bankruptcy has two costs: court fees and lawyer fees. Court fees are set by federal law and do not vary. For Chapter 7, court fees are $338. For Chapter 13, they are $313. These fees are paid to the court when you file.
Lawyer fees vary widely depending on where you live and the complexity of your case. For a straightforward Chapter 7 with no assets and no complications, lawyers typically charge $1,000 to $3,000. For Chapter 13, where the lawyer must draft and negotiate a repayment plan, fees typically run $2,500 to $6,000. Some lawyers allow you to pay in installments, and some courts allow you to request a fee waiver if you cannot afford the court fees.
If you cannot afford a lawyer, you can file without one, but this is risky. Bankruptcy has strict rules about forms, deadlines, and what you must disclose. A mistake can result in your case being dismissed, leaving you back where you started with no protection from creditors. Legal aid organizations in your area may offer free or low-cost bankruptcy help; you can search for them through the Legal Services Corporation website.
The credit counseling and financial management requirements
Federal law requires you to complete two courses before and after bankruptcy. The first is a credit counseling course, which you must finish before you file. This is a brief session—usually one to two hours—where a counselor reviews your budget and debt situation. It is not designed to stop you from filing; it is meant to make sure you understand your options.
You can take this course online, by phone, or in person through an agency approved by the U.S. Trustee Program. The cost is typically $50 to $100. Once you complete it, you receive a certificate that you file with your bankruptcy paperwork.
After your case is filed, you must complete a financial management course before your debts are discharged. This course covers budgeting, credit, and how to rebuild after bankruptcy. It also takes one to two hours and costs $50 to $100. Without this certificate, your debts will not be erased or your repayment plan will not be approved.
How filing affects your credit and borrowing for years
Bankruptcy is the most damaging mark on a credit report. It causes your score to drop sharply—often by 100 to 200 points or more—and stays on your report for seven years (Chapter 13) or ten years (Chapter 7). During that time, lenders can see it and often will deny you for credit cards, mortgages, auto loans, and even rental housing.
However, the damage is not permanent. After about three to four years, some lenders will work with you again, though at higher interest rates. After five to seven years, your options expand further. By the time bankruptcy falls off your report entirely, you can rebuild to a decent score if you pay bills on time and keep credit card balances low.
Some things actually improve immediately after bankruptcy. If you had high credit card balances, those are now gone or greatly reduced, which improves your credit utilization ratio. If you were being sued or had a judgment against you, that is now resolved. These improvements can help your score recover faster than the bankruptcy itself might suggest.
What happens to your assets in Chapter 7
In Chapter 7, a trustee is appointed to review your assets and sell anything that is not protected by exemptions. Exemptions are state and federal rules that let you keep certain things—your primary home up to a certain value, your car, retirement accounts, and basic household items. Most people filing Chapter 7 have few or no assets to lose because their money went to debt, not savings.
If you own a home with equity, own a car outright, or have savings or investments, some of that may be sold to pay creditors. However, most states have generous exemptions. For example, many states exempt your primary home entirely or up to a certain amount of equity. Your retirement accounts like a 401(k) or IRA are almost always protected. A bankruptcy lawyer can tell you exactly what you might lose based on your state's exemptions and your specific situation.
In Chapter 13, you keep all your assets. The trustee does not sell anything. Instead, you pay a portion of your income toward your repayment plan for three to five years. This is why Chapter 13 is often the better choice if you own a home or car you want to keep.
The timeline from filing to discharge
Chapter 7 typically takes three to six months from filing to discharge. Here is the basic timeline: you file paperwork with the court, attend a meeting of creditors (usually a brief hearing where a trustee asks you questions about your finances), and then wait for the court to discharge your debts. During this time, the automatic stay is in effect, so creditors cannot collect.
Chapter 13 takes longer because you are entering a repayment plan. You file paperwork, attend a meeting of creditors, and then the court confirms your repayment plan. This confirmation hearing can take several months. Once confirmed, you begin making monthly payments to the trustee, who distributes the money to your creditors. The plan lasts three to five years depending on your income and how much you owe.
Delays can happen. If you do not file required documents, if creditors object to your plan, or if your financial situation changes, the timeline stretches. This is another reason having a lawyer helps—they manage deadlines and paperwork so your case moves forward.
Frequently Asked Questions
Can I file bankruptcy if I am still working and earning decent income?
Yes, but which chapter you file depends on your income. If your income is below your state's median, you can file Chapter 7. If it is above, you must file Chapter 13 instead. Chapter 13 is specifically designed for people with steady income who can afford a repayment plan. Your income does not disqualify you from bankruptcy; it just determines which type you use.
Will bankruptcy stop a wage garnishment that is already happening?
Yes. The automatic stay stops wage garnishment immediately. Once you file, your employer must stop sending money to the creditor. If the garnishment was for a credit card debt, it will be erased in Chapter 7 or included in your repayment plan in Chapter 13. If it was for a tax debt or child support, those cannot be erased, but the garnishment still pauses during your case.
What happens if I file bankruptcy and then get more credit card debt?
New debt incurred after you file is not erased by bankruptcy. It is treated as a separate obligation. If you file Chapter 7 and then rack up new credit card debt before your case closes, that new debt will not be discharged. If you file Chapter 13, new debt is not included in your repayment plan. This is why bankruptcy is meant to be a fresh start—the idea is that you change your spending habits after filing.
Can I keep one credit card if I file bankruptcy?
No. Bankruptcy erases or restructures all your debts, including all credit cards. You cannot pick and choose which debts to include. However, after bankruptcy is discharged, you can apply for a new credit card. Secured credit cards—where you deposit money as collateral—are often the easiest to get approved for after bankruptcy, and they help you rebuild credit.
Do I have to tell my employer that I filed bankruptcy?
No. Bankruptcy is a private legal matter. Your employer does not have to know unless you are filing Chapter 13 and the court needs to verify your income, or unless your employer is a creditor you owe money to. However, if your wages are being garnished and bankruptcy stops it, your employer will notice the garnishment stops—but they will not know why unless you tell them.