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One of the questions I see most often is "Can I keep a credit card after I file for bankruptcy?" The short answer is: usually not. But there are some exceptions. Because credit card debt is classified as unsecured debt it is treated differently from unsecured debt in a bankruptcy. Sometimes secured debts such as car loans and mortgages can be held on to during a Chapter 7 or a Chapter 13 bankruptcy, but in either case, credit card debt is usually earmarked for partial or total liquidation. Here’s what you need to know about treatments of credit cards during and after bankruptcy:
Chapter 7 Bankruptcy
If you have credit cards with a balance on them, you are required to list them on the bankruptcy petition. This makes them part of the bankruptcy action and they will be sent notice that you are in Chapter7. The banks or financial firms that provide the cards will then close the account and note that you are in bankruptcy. If you have a card that has a zero balance though, you won’t have to list it. You may think that this means you’ll be able to keep it during and after your bankruptcy, but in my experience it just doesn’t work out this way.
Why? Because credit card companies periodically check your credit – mostly so they can increase your interest rates if you have late payments on any of your financial products – they will eventually find out and will usually close your account at that time. Why? Because once you’re protected by Chapter 7 bankruptcy, it is illegal for creditors to contact you. Even sending you a monthly credit card statement can be construed as violating this law, so they won’t risk it.
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Chapter 13 Bankruptcy
Because chapter 13 bankruptcies are debt repayment plans, the whole idea is to be lowering your total debt each month. Allowing you to keep an open credit card account runs the risk of you increasing your debt and Trustees don’t want that. You are not supposed to take out new debt while you are in the chapter 13 repayment process. Letting you keep a credit card only encourages you to get in deeper so they generally won’t let you. Here’s the exception. If you need a credit card for work – for instance, if you travel for work and have to be able to book hotel reservations or rental cars and it’s a condition of your continued employment.
But even if the Trustee lets you keep a card, they’ll usually place conditions that you’ll have to meet every month. Prime among these is that you must pay it off in full each month when you’re reimbursed for your travel so that you are not, in fact, driving up your overall debt any. Likewise if you’re a small business owner and need a card to secure certain supplies, the Trustee may make an exception and let you keep a card as long as you zero out the balance each month!
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Life Without Credit Cards
Most of us have had a credit card (or two, or three) since college and the idea of not having one in your wallet may make you panic. You may be used to relying on your credit cards as a fallback when you have an unexpected expense or financial emergency. The good thing is that you should be able to sock some cash away for emergencies now that you’re not drowning in debt if you’re in Chapter 7.
Things can be a little tougher in Chapter 13 scenarios. Either way, you’ll just have to ride out the situation naturally and once some time passes, you’ll start getting credit card offers again and you’ll want to go slowly and rebuild your credit without getting in over your head. This will allow you to rebuild your credit and regain your financial footing.
For more advice on what will happen with your credit cards during bankruptcy, contact a reputable North Carolina bankruptcy attorney. The law offices of John T Orcutt have a several convenient locations for you to choose from and our lawyers are ready to help you today. Contact us for a free consultation!