by: Baran Bulkat, Attorney
In general, simply ignoring your credit card bills will not make them go away. If you default on your credit cards, the credit card company can sue you to recover its debt. Filing for bankruptcy can stop all collection efforts and eliminate your credit card debt. But it may not be for everyone. Read on to learn more about what happens if you don’t pay your credit card debt and whether bankruptcy can help you.
If you stop making payments on your credit cards, the first thing you will receive is a lot of collection letters and phone calls from your credit card company telling you that you are in default. Depending on how much you owe, if you ignore the collection calls, the credit card company can assign your account to a collection agency and write it off as a bad debt or take you to court.
If the credit card company sues you and you do nothing, it will obtain a judgment against you. Once a creditor has a judgment, it may be able to garnish your wages, levy your bank accounts, or place liens against your assets. However, if you don't have any assets worth going after and you have no or little income (the amount that a creditor can garnish from your paycheck is limited by law), the creditor won't be able to take anything from you.
See Bankruptcy and Credit Card Debt Lawsuits for more information.
Filing lawsuits and pursuing borrowers in court is expensive. In most cases, credit card companies want to avoid the hassle and expense of litigation. As a result, they will typically be willing to settle your account for less than you owe.
However, most credit card companies don’t consider settling until you have been in default for many months. During this time, you will have to endure numerous calls and other collection attempts by the credit card company or its agents. But even if you are willing to work with your creditors, settling your credit card debt can have negative tax consequences (discussed below).
If a credit card company agrees to settle your account for less than the balance you owe, it is essentially forgiving a portion of your debt. Under certain circumstances, the Internal Revenue Service (IRS) may consider this “cancellation of debt” to be taxable income. If you have a significant amount of forgiven debt, it can substantially increase your tax liability.
Further, recent income tax obligations are typically nondischargeable in bankruptcy. This means that you would not be able to wipe them out even if you decide to file for bankruptcy after settling your debt. Whether the IRS will consider your forgiven credit card debt taxable income depends on numerous factors including your financial situation. Because tax laws are extremely complex and tend to change frequently, talk to a tax professional in your area to learn about the tax implications of settling your credit card debt.
If you are struggling to pay your credit card bills, filing for bankruptcy can stop the collection calls and wipe out your credit card debt (without negative tax consequences). However, whether bankruptcy is the right choice for you depends on a variety of factors including the amount of income, assets, and debt you have.
Keep in mind that once you receive a bankruptcy discharge, you will not be eligible for another one for a long time (discharge limits vary depending on the type of bankruptcy filed but if you filed for Chapter 7 bankruptcy and received a discharge you can’t file for another Chapter 7 for eight years). As a result, if you only have a small amount of credit card debt, filing for bankruptcy to wipe it out may not be in your best interest.