Will filing for bankruptcy clear my credit card debt?

Credit card debt is becoming an increasingly heavy burden for many Americans. Over the last few years, the cost of borrowing has increased significantly, resulting in mounting financial pressures for cardholders who are carrying a balance. As a result, delinquency rates on credit card payments are on the rise and a staggering one in five cardholders have maxed out their available credit limits. Some cardholders are even being pushed to the brink of insolvency as their credit card debt burden grows.

At the heart of this growing crisis are rising credit card interest rates. Credit card APRs recently climbed to a record-breaking average of nearly 23%, which means that any outstanding balances that carry over from month to month are subject to rapid growth due to compounding interest charges. And, some cardholders — especially those with lower-than-average credit scores — have credit cards with rates that far exceed the national average, making it extraordinarily difficult for them to chip away at their revolving balances.

For those feeling overwhelmed by their credit card debt obligations, the prospect of filing for bankruptcy can seem like a lifeline worth grabbing. But while bankruptcy may offer a way out for some, it's crucial to understand whether bankruptcy can truly clear your credit card debt — and what the long-term consequences of choosing this path could be.

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Will filing for bankruptcy clear my credit card debt?

While each situation is unique, filing for bankruptcy can clear your credit card debt in many cases. However, the process is not as simple or consequence-free as some might hope. 

There are typically two main types of personal bankruptcy to consider: Chapter 7 and Chapter 13. Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," can effectively wipe out most unsecured debts, including credit card balances. Chapter 13 bankruptcy, on the other hand, involves a reorganization of debts rather than an outright elimination. 

When you file for Chapter 7 bankruptcy, a court-appointed trustee will sell off your non-exempt assets to pay back creditors. After this liquidation, remaining eligible debts are discharged, meaning you're no longer legally obligated to pay them. For those who are overwhelmed by high amounts of credit card debt, this can provide a clean slate and a chance to rebuild their financial lives.

When you file for Chapter 13 bankruptcy, you'll work with the court to create a repayment plan lasting three to five years. During this time, you'll make payments toward your debts, generally at reduced amounts or interest rates. At the end of the repayment period, any remaining eligible debts may be discharged.

While either type of bankruptcy can offer at least some relief from overwhelming credit card debt, it's crucial to understand that this solution comes with serious repercussions. A bankruptcy filing will remain on your credit report for seven to 10 years, significantly impacting your ability to obtain new credit, rent an apartment or even secure certain types of employment. Your credit score will take a major hit and rebuilding your creditworthiness will be a long and challenging process.

Bankruptcy doesn't guarantee that all your debts will be wiped clean, either. While it may help reduce or eliminate your credit card debt, certain types of obligations, including student loans, recent tax debts and child support payments, typically cannot be discharged through bankruptcy. 

Don't file for bankruptcy before comparing your other debt relief options. Learn more here.

Bankruptcy alternatives to consider

Given the serious consequences, it typically makes sense to explore other options before filing for bankruptcy. After all, there are alternatives to help you manage your credit card debt without the long-lasting impact of a bankruptcy filing, including:

• Debt settlement (or debt forgiveness): This option involves negotiating with your creditors for a lump sum payment that's less than what you owe on your credit cards. If successful, the remaining portions of your credit card balances are forgiven, which can reduce your overall debt. 
• Debt consolidation: Consolidating your debt involves taking out a new loan to pay off multiple credit card debts. The goal for the new loan is to obtain a lower interest rate, making your monthly payments more manageable and potentially saving you money in the long run. 
• Debt management: If you need some relief from your high-rate debt but are still able to keep up with your payments, a credit counseling agency can help you set up a debt management plan. With this route, the agency works with your creditors to potentially lower your interest rates and create a structured repayment plan. You make a single monthly payment to the agency, which then distributes the funds to your creditors.
• Creditor negotiations: Your credit card issuers may be willing to work out a payment plan or settlement if you're struggling to make payments. They may agree to lower your interest rate, waive certain fees or even accept a lump sum payment for less than the full amount owed.

The bottom line

While bankruptcy can indeed clear credit card debt, in most cases, it should be viewed as a last resort due to its long-lasting negative impacts. Before considering such a drastic step, it makes sense to explore other debt management strategies that could help you regain control of your finances without the severe consequences of a bankruptcy filing. And while the path to financial stability may be challenging, with careful planning and determination, it's possible to overcome even substantial credit card debt.