In today’s uncertain economy, more Americans are struggling with credit card debt than ever before. Inflation, high interest rates, and increasing unemployment have left many consumers relying on credit just to cover their basic living expenses. Unfortunately, once credit card balances grow, it can be nearly impossible to escape the cycle of debt by paying just the minimum required payments alone. As a result, many people turn to debt settlement or other non-bankruptcy debt relief options, hoping for a quick fix but such solutions often do not deliver relief and can often make financial matters even worse. If you are facing unmanageable credit card debt, bankruptcy may offer the most effective, fastest and legally protected path to a financial fresh start.
Rising Credit Card Debt
According to the New York Federal Reserve, in the second quarter of 2025, credit card debt increased by $27 billion and now totals at $1.21 trillion outstanding. Economic instability and the rising cost of living have forced countless Americans to depend on their credit cards to cover basic living expenses. Groceries, gas, and even emergency expenses often end up charged on high-interest cards. With today’s average credit card interest rates hovering around 20–30%, balances can spiral quickly. Even diligent consumers who make minimum payments will find their principal balances hardly decrease. As interest compounds, it becomes increasingly difficult to pay down any principal, trapping consumers in a long-term cycle of debt. This issue is further exacerbated by the fact that between 25 to 29% of Americans are living paycheck to paycheck, according to a recent internal study by Bank of America.
Bankruptcy as a Path to Debt Relief
Unlike debt settlement or debt consolidation programs, bankruptcy provides a legal process that all creditors must recognize and protects debtors from creditor harassment and collection activity. Once a bankruptcy petition is filed, an automatic stay immediately goes into effect (see 11 U.S. Code § 362), that strictly prohibits all collection activity from creditors including collection calls and emails, lawsuits, wage garnishments, frozen accounts, and foreclosure auctions.
There are two main types of consumer bankruptcy available under federal law:
- Chapter 7 bankruptcy, which eliminates most debt and provides a fast “fresh start,” and
- Chapter 13 bankruptcy, known as “reorganization,” which provides a 36-to-60-month structured repayment plan for your debt. Depending on the circumstances, a debtor may only pay a fraction of what is owed.
Each type of bankruptcy offers unique advantages depending on your income, assets, and financial goals.
Chapter 7 Bankruptcy – A Fast Fresh Start
Chapter 7 bankruptcy is often the quickest and most straightforward way to eliminate credit card debt entirely. In a Chapter 7 bankruptcy case, a debtor files a petition that discloses their assets, including the appropriate bankruptcy exemptions that protects certain property and often most assets, lists their monthly income and expenses, and their liabilities and creditors. Once a Chapter 7 case is filed, an automatic stay immediately goes into effect that prohibits any further collection activity from creditors.
Approximately 4-6 weeks after the petition is filed, the debtor is then required to appear at a court hearing known as 341(a) creditor’s meeting, where they will answer questions under oath before a Bankruptcy Trustee assigned to their case. Although it is called a “creditors” meeting, typically creditors do not appear. In the Eastern and Southern Districts of New York, since Covid, these hearings are done remotely via Zoom. It is typically the only hearing a debtor is required to attend.
Generally, two to three months after the 341(a) meeting is closed, the Bankruptcy Court will issue a discharge order that permanently eliminates the eligible debts listed in the petition. This includes unsecured debts such as credit card debts, personal loans, personally guaranteed business loans, auto loan deficiencies and medical bills. It also includes secured debts, such as mortgages and car loans. Please note that the creditor’s security interest is not affected by the bankruptcy. Accordingly, if the secured obligation is not paid, the creditor would have the right to seek return of the collateral by lifting the automatic stay, but they cannot pursue any loan deficiencies, since that debt will be discharged in bankruptcy.
Bankruptcy exemptions allow a debtor to protect and retain certain assets such as a set amount of equity in a home in which they live (house, condo or co-op), some equity in a motor vehicle, most retirement accounts, an interest in personal injury case but only up to certain monetary limits and other assets as well. The vast majority of cases are deemed “no asset,” meaning that all of the debtor’s assets and property are protected by the various available bankruptcy exemptions. Allowing a debtor to keep these assets enables a debtor to best take advantage of a financial fresh start. However, if a debtor has assets that are above the exemption limits or there is no exemption for, the Bankruptcy Trustee assigned to the case can take in interest in the non-exempt portion of the asset or non-protected asset and liquidate it to pay back the creditors in the case. However, if the debtor has the means to do so, they can negotiate a settlement with the Trustee to retain the non-exempt asset and buy back their interest.
To qualify for Chapter 7, a debtor may have to determine if they are subject to a bankruptcy Means Test. The bankruptcy Means Test, which is basically a budget test contained within the bankruptcy code, is required when the debtor’s household income is above the median income levels in the state in which they reside, and the majority of their debt is consumer-based. If a debtor’s household income is below the median income level required for the test, they may automatically qualify for Chapter 7. If it is above the median income level, they may be subject to the Means Test. Under the test, all the household income of the debtor needs to be included in the calculation other than Social Security, Veteran’s or Department of Defense benefits. For the budget expense side of the test, IRS local and regional living standards are used in place of most of the actual household expenses of a debtor. The results of the test calculation are meant to determine if a debtor has sufficient disposable income to pay back at least a portion of their debt in a Chapter 13 payment plan. If a debtor passes the test, they may qualify for Chapter 7, but if they fail, they are restricted to a Chapter 13 bankruptcy filing.
Even if a debtor qualifies for Chapter 7 bankruptcy from a Means Test perspective, they still must show that their actual monthly household budget does not have disposable income that could be used to fund a Chapter 13 plan. For example, for those debtors who pay low or no rent, their monthly budgets may show surplus income. These debtors would be restricted to Chapter 13 bankruptcy. For many consumers struggling with high-interest credit card debt, Chapter 7 can provide fast, powerful relief and that still provides the opportunity to rebuild credit shortly after discharge.
The key benefits of Chapter 7 bankruptcy include:
- Provides a fast, fresh start.
- All creditors must recognize the bankruptcy filing.
- The automatic stay protects the debtor from creditors and prohibits collection activity.
- No negative tax consequences from debt eliminated by the discharge.
- Can start to rebuild credit quickly upon discharge.
Chapter 13 Bankruptcy – Court Ordered Debt Repayment Plan
Chapter 13 bankruptcy allows a debtor to restructure their debt into 36-to-60-month court-approved repayment plan. It is a great option for debtors who have sufficient income to pay back their creditors or for those debtors who fail the Bankruptcy Means Test. It is also an option for debtors who own assets whose value is either above the applicable bankruptcy exemption limits or not covered by any exemption. Typically, this includes excess equity in a home, coop or condo but can be used for any other valuable assets that they want to protect from liquidation. Chapter 13 bankruptcy is also ideal for homeowners facing foreclosure since it can stop any pending legal action or sale date and enable the homeowner to pay the mortgage arrears through a 5-year payment plan.
Under Chapter 13 bankruptcy, along with the petition, a debtor files a proposed repayment plan that is typically 60 months long (but can be shorter) and consolidates their eligible debts into one monthly payment made to a court-appointed Trustee. Once the debtor’s petition is filed with the Court, an automatic stay immediately goes into effect as in a Chapter 7 case and similarly, a debtor is required to attend a 341(a) meeting before the Trustee assigned to their case. Within 30 days of the bankruptcy filing, the debtor is also required to start making their Chapter 13 plan payments to the Trustee. The creditors in the case have just 70 days to file claims with the Court (180 days for governmental units) in order to be eligible to be paid by the Trustee upon the plan confirmation. Next, if the debtor’s plan is feasible and acceptable to the Court, it can be formally approved at a confirmation hearing with the judge assigned to their case.
Once the plan is confirmed, the Trustee will start paying the claims filed by the creditors, which are paid interest-free in most cases. For various reasons, a creditor may not file a claim in a Chapter 13 case, especially given the relatively short time frame allowed. Debts without properly filed claims are eliminated at the end of the plan and discharged just like in a Chapter 7 case. As a result of this, in many cases, a debtor may pay less than the full amount of their debt that is initially set forth in their schedules. Furthermore, depending on the particulars of the case, a debtor may only have to pay a percentage of the unsecured debt in their plan. However, a debtor paying a percentage plan must relinquish any tax refunds received during the duration of the plan but not in excess of the claims that are filed in a case.
Chapter 13 bankruptcy may also be the best option for homeowners who are seeking to retain their home when they are behind on their mortgage payments and possibly facing foreclosure or in an active foreclosure action. It provides an automatic stay against foreclosure proceedings, including a possible sale date and allows the homeowner to catch up on past due mortgage payments through an interest free repayment plan. In addition, this is often a better option than obtaining a loan modification since a debtor can retain a favorable mortgage interest rate in Chapter 13 bankruptcy. Current mortgage loan modifications are typically at market rate which is presently in the 6-7% range. Chapter 13 bankruptcy can save a homeowner tens of thousands of dollars over the life of their loan when compared with a loan modification that increases their mortgage interest rate.
Key benefits of Chapter 13 bankruptcy include:
- Interest-free repayment on most debts.
- Allowing a debtor to keep nonexempt assets.
- An orderly and affordable debt repayment plan.
- Court-mandated participation by creditors, no negotiation required.
- Protection from foreclosure or repossession, enabling homeowners to keep their property.
- Many debtors pay back only a portion of what they owe if creditors fail to file claims or if the plan only pays a percentage of unsecured balances.
- Keeping the terms of an existing mortgage.
The Pitfalls of Debt Settlement
Debt settlement programs are debt relief options promoted by for-profit companies (often highly advertised on tv, radio and online) that promise to reduce credit card balances by negotiating directly with creditors. However, the process is risky and rarely delivers on what it promises. In debt settlement, the enrollee is advised to stop making their debt payments to intentionally go into default, since creditors will typically not negotiate a debt balance when a debtor is current on an account. Simultaneously, the debtor will make monthly payments to the debt settlement company to attempt to save enough of their money to settle each outstanding debt one at a time. The problem is that most debt settlement plans do not work and rarely make it to completion for the following reasons:
- There are no guarantees. Creditors are under no obligation to accept settlement offers. Furthermore, some creditors simply do not participate in debt settlement programs and will not negotiate with them at all.
- In contrast to bankruptcy, there is no automatic stay. While in debt settlement, there is no stay against ongoing collection actions, lawsuits, wage garnishments, bank levies and creditor harassment. In fact, many enrollees are served with collection lawsuits and judgments while in debt settlement, especially since the companies are attempting to settle one debt at a time over a period of time.
- They may be called programs, but they are not endorsed or part of any actual government program. Many government regulators actually advise to be wary of such programs.
- They are expensive. The fees for these programs are often up to 25% or more of a debtor’s outstanding balances are and not based upon what is saved. Additionally, a debtor may owe taxes on any debt forgiven over $600, per IRS regulations.
- There are often minimal actual savings from debt settlement programs. When you add in all the costs of the program and that the typical actual settlement amount of 50-75% of outstanding debt balances, there can be minimum actual savings. The real benefits are even worse when taking into account that not all creditors are typically willing to negotiate with debt settlement companies.
- They can cause severe credit damage, which is often worse or more lasting than filing for bankruptcy.
- They have long timelines. Debt settlement programs can take years to complete. During that time, the participant remains unprotected from creditors collection actions and judgments.
Making matters worse, by the time many debtors realize the debt settlement process is not working, they have wasted thousands of dollars and destroyed their credit even further. Unlike debt settlement, bankruptcy is governed by federal law (see Title 11 of United States Code) and offers immediate protection to debtors. In both Chapter 7 and Chapter 13 bankruptcy, bankruptcy offers a clear legal path to debt relief, unlike debt settlement programs that depend on uncertain negotiations with no legal protections.
Contact the Law Offices of David I. Pankin, P.C.
Managing overwhelming credit card debt can be very stressful, but you do have options. Bankruptcy is a legal process that was designed to help consumers quickly recover from financial hardship and regain stability. If you are facing mounting bills, endless collection calls, threats of lawsuits, or if it is simply becoming unsustainable to continue making your monthly debt payments, speaking with an experienced New York bankruptcy lawyer is the best first step. At the Law Offices of David I. Pankin, P.C., we have helped over fifteen thousand New Yorkers find real debt relief through Chapter 7 and Chapter 13 bankruptcy. Please feel free to contact us today at (888) 529-9600 or fill out our simple online contact form to schedule a free bankruptcy consultation. Find out how we can help you stop creditor harassment, eliminate debt, and take the first step toward building a strong financial future.
