The Difference
| Feature | Unsecured Credit Card | Secured Credit Card |
|---|---|---|
| Collateral | None | Cash deposit |
| What happens in Ch. 7 | Debt discharged entirely | Deposit applied to balance; excess discharged |
| Creditor can take property? | No (unless they have a judgment lien) | Only the deposit |
| Most common type | Yes -- vast majority of credit cards | No -- used mainly for credit building |
Unsecured Credit Cards in Bankruptcy
Standard credit cards -- Visa, Mastercard, Discover, American Express, store cards -- are all unsecured. There is no collateral backing the debt. In Chapter 7, these balances are discharged entirely. In Chapter 13, they are paid at whatever percentage the plan provides (often 0-10%).
This is the simplest category of debt in bankruptcy. No negotiations, no valuations, no motions. The debt is listed on Schedule F as general unsecured, and it disappears at discharge.
Secured Credit Cards in Bankruptcy
A secured credit card requires a cash deposit that serves as collateral. If you have a $500 deposit and owe $400, the card issuer keeps the $400 and returns $100. If you owe $600, the issuer keeps the $500 deposit, and the remaining $100 is treated as unsecured debt -- dischargeable in Chapter 7.
Section 506(a): A secured claim is allowed only to the extent of the value of the collateral. For secured credit cards, the collateral is the cash deposit. Any balance exceeding the deposit is an unsecured claim.
Store Cards and Retail Credit
Store credit cards (Target, Best Buy, Macy's, Amazon) are unsecured credit. Even though you bought merchandise with the card, the store does not have a security interest in the items you purchased (with rare exceptions for purchase-money security interests in the card agreement).
In practice, retail creditors almost never enforce security interests in consumer goods. The cost of repossessing used merchandise is not worth the effort. These balances are treated as general unsecured debt and discharged.