Secured v. Unsecured Credit Card Accounts in Chapter 7 Bankruptcy

Today, the use of a credit card is a part of our everyday lives. Individuals use their credit cards to gather points toward a next purchase or accrue frequent flyer miles when booking their next big vacation. Unfortunately, many good people fall victim to bad credit card debt due to unforeseen and challenging circumstances. According to a consumer report by the U.S. Census Bureau and the Federal Reserve, there were $762 billion dollars of outstanding credit card debt in the United States in 2016. The average American has an estimated $5,700 in credit card debt. According to the June report, approximately 819,159 people filed for bankruptcy in 2016. Depending on whether the credit card debt is acquired through a secured or unsecured credit card account, an individual may be able to wipe out some of their credit card debt by filing for Chapter 7 bankruptcy.

When an individual acquires a credit card, he or she signs what is known as a credit contract that contains the terms and conditions of the agreement. Essentially that person is entering an agreement to promise to pay the debt that accrues, meaning that he or she is promising to pay back the amount that was charged on the credit card.  Credit card contracts also include terms which subject the cardholder to pay interest on the amount that is owed. If this is the case, then the individual is also agreeing that he or she will pay the charged amounts as well as the interest on the credit card.

Unsecured credit cards are cards that will get wiped out in a Chapter 7 bankruptcy. Most credit card accounts are considered unsecured. This means that if an individual does not pay his or her monthly payment as agreed, the creditor cannot take back the items that you purchased in order to satisfy your obligation to them. When signing an unsecured credit card contract, the person only agrees to pay the charged amount and any interest, but no additional costs.

When the money is unable to be retrieved by the credit card company they will “charge-off” the debt. This means that the credit card company sells the uncollected debt to a collection agency and “writes it off the books.” The collection agency will then file a lawsuit against a consumer to obtain a money judgment. Filing a lawsuit is a creditor’s only recourse in retrieving funds from a consumer who has not paid their monthly payments. Once a judgment is made by the court, the collection agency will seek to put debt collection procedures in place, such as garnishing wages from a paycheck.

Unlike unsecured credit card accounts, debts accrued from secured credit card accounts do not go away when an individual files for bankruptcy. Secured credit card accounts are those where one has purchased “big ticket” items such as furniture, jewelry, or appliances through store accounts. Ordinarily, when someone enters into a credit card contract with a store, it is considered a purchase money security agreement. A purchase money security agreement is an agreement with the store that, if you fail to pay, the merchandise that was purchased is a guarantee of payment. Therefore, the store can locate and retrieve the items that you purchased. In a bankruptcy proceeding, a secured credit card account holder has the option of bringing the item back to the store or keeping the item and continuing to pay off the accrued debt.

If you have maxed out on your credit cards or facing a debt collection lawsuit, it is important to immediately consult a skilled New York credit card debt attorney who can assist you in finding the best debt relief option available. Jacovetti Law, P.C. is experienced in New York consumer protection matters, including resolving credit card debt. Our debt relief lawyers work with clients to assess their situation and advise them on the best path to financial stability. To schedule a free 15-minute telephone consultation or office visit, call our New York credit card debt relief law office at Sub:Phone} or fill out our contact form.