Can I keep my credit cards after filing bankruptcy?
One of the common factors that contributes to people having to declare bankruptcy, along with job loss or an adjustable rate mortgage that turns out to be beyond a person’s means to pay, is credit card debt. It is very easy for someone to misuse a credit card. This may be because they do not understand how high of an interest rate credit card companies often charge on a credit card balance (and therefore how difficult it is to dig themselves out from under that credit card debt). Or they may choose to use credit cards as a last resort to keep things financially afloat for as long as is possible when they are running short of money, again resulting in a balance and interest they are unable to repay.
But if you are considering bankruptcy and credit card debt has not been a contributing factor leading up to that bankruptcy, you may want to keep
that credit card. After all, a credit card can be useful to make reservations when travelling or to make reasonable living-expense related purchases until you receive your paycheck and can pay off the balance. Can you in fact keep a credit card if you declare bankruptcy? And if so, what is the impact on the balance and interest rate of that credit card?
What is the bankruptcy process?
In general, keeping a credit card through a bankruptcy is difficult. When you declare bankruptcy, you need to list all of your debts, including all of your credit card debt, so the bankruptcy court can prioritize repayment of those debts. Generally, with credit card debt being unsecured and therefore a lower priority for repayment, the credit card company will not receive all of the money they are owed. A Chapter 7 bankruptcy will usually completely wipe out unsecured credit card debt and a Chapter 13 bankruptcy will likely repay at best only part of your credit card debt balance. In either case, you can expect the credit card company to cancel your credit card.
Even if you have a credit card with a zero balance leading into the bankruptcy or as a part of the bankruptcy you manage to re-affirm payment of the balance, there is a chance the credit card company will cancel your credit card as a part of the bankruptcy anyway. The bankruptcy will make the card company nervous in essence about whether you can or will continue to make payments on any balance on the card going forward, so the credit card company will likely eliminate your credit card to manage their risk.
How should I handle credit card debt prior to filing bankruptcy?
There are a few other points related to credit cards and bankruptcy that are worth mentioning. First, you should not attempt to pay off your credit card balance before you declare bankruptcy under the belief it will increase the chance you can keep the credit card. When you declare bankruptcy, it is the right of the bankruptcy court to determine the order in which your debt is paid off. You choosing to pay off your credit card balance before the bankruptcy happens is considered you taking the debt prioritization out of the hands of the bankruptcy trustee. The bankruptcy court will therefore likely force the credit card company to return the money you used to pay off the balance and the court may even deny your bankruptcy as a whole. Therefore, paying off your credit card debt just before a bankruptcy is not a wise idea.
Nor is it a good idea to run up debt on your credit cards just before declaring bankruptcy. A bankruptcy court will likely learn of the increase in credit card activity in the days or months leading up to the bankruptcy, which could result in the credit card balance being excluded from the bankruptcy or your bankruptcy as a whole being denied.
In closing, know that your best bet may be to obtain a new credit card after your bankruptcy. If you work with a reputable credit repair company after your bankruptcy, it may not take very long to establish enough new payment history to obtain a credit card. However, you can expect this credit card to carry a higher interest rate than the rate you could obtain on a credit card before declaring bankruptcy.
You may also get a new credit card after bankruptcy by obtaining a secured credit card. Such a credit card is one where your credit limit is directly tied to an amount of funds you give to the credit card company when obtaining the credit card. For example, if you have $1,000 to give to the credit card company as a deposit, the credit card company will issue you a credit card with a $1,000 credit limit. Such a card leaves the credit card company with no liability, as should you default on a balance, the card company will simply use the original $1,000 you provided to satisfy the debt. As you use the card and pay off the balance, it will help to re-establish your credit.
Remember the information above is general in nature. The bankruptcy laws vary from state to state, so the options you may have to keep a credit card could be different than what is noted above. Therefore, you should speak with a bankruptcy attorney who is familiar with the bankruptcy laws of your state and can determine what options are available for your individual situation.
- Collections, Charged Off Debt, and Bankruptcy (betterbankruptcy.com)
- Will Filing a Chapter 7 Protect Rental Property Used for Your Kids? (betterbankruptcy.com)
- Chapter 7 and When to File a Non-Consumer Bankruptcy (betterbankruptcy.com)
- What are the Responsibilities of Co-debtors in Bankruptcy? (bankruptcy7-13.com)
- A Credit Card and the Diary of a Debtor (betterbankruptcy.com)
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