In an era of extreme homeowner hardship and surging unemployment, most people worry that debt-free living through bankruptcy will leave them without a credit card in an uncertain world where plastic is widely-accepted. Fortunately, filing for bankruptcy doesn’t have to mean losing your credit cards—or the opportunity to access new ones.
While you’re required to list all outstanding debts owed when filing for bankruptcy, including credit card debt, accounts with no balance can be omitted and kept. Additionally, for those cards with balances, a majority of credit card providers allow you to hold on to their credit card for use after bankruptcy if you agree to reaffirm the card balance and enter into a new agreement after filing. This “Reaffirmation Agreement” documents your willingness to continue to be responsible for this debt after the bankruptcy is discharged—allowing for a little extra insurance for unexpected expenses in the years to come. While reaffirmation may be an option, you should really take full advantage of your bankruptcy discharge by getting rid of all of your debts. What sense does it make to file for bankruptcy, but remain on the hook for some of the debt?
Even if your credit cards don’t follow you after your bankruptcy filing, it doesn’t mean you remain credit-less. While you may not qualify for certain loans following a bankruptcy, secured credit cards (otherwise known as “second chance cards”) are still available to reestablish and rebuild your credit by continually proving, and improving, your credit score even before your bankruptcy falls from your credit report.
Even better, secured credits cards are low risk. When you receive a secured card, an upfront deposit is required creating a sort of savings account for that card. The credit limit of your card is often very low— typically $500 or less to start—constituting the amount of money in your card’s account. As a result, this type of card promotes healthy spending practices and prevents missed payments, an inability to easily pay off the card’s balance, and many of the other financial woes sometimes associated with unsecured cards. As such, a secured card’s limit can actually rise with your credit score or after several months of on time payments—thereby rebuilding your credit, and your credit confidence, after bankruptcy.
To begin making a secured credit card work for you following bankruptcy, it’s always a good idea to read the fine print. Look for a card with no application charges. Also, seek a reasonable annual fee as these automatic expenses don’t count toward your credit score and might otherwise easily eat away at a small credit limit. Similarly, verify that your secured credit card reports to the three major credit bureaus, assuring that there’s a clear record of your positive credit usage—even if it is credit created with your own money.
Finally, depending on the programs available at your bank, credit union or other secured credit provider, you are able to inquire as to whether your card can be converted to a more familiar, higher limit unsecured card after you’ve been on time with your secured payments for a year or more. The result is a new credit-rich card in your wallet and, this time around, months of healthy spending habits under your belt.
For more information on “The Truth About Bankruptcy,” click here to visit The Law Offices of John T. Orcutt online.