How Zero Balance Credit Cards Are Treated in Bankruptcy

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Out of control credit cards can certainly cause financial grief, but are not the primary driver in most bankruptcies. However, once a major life event such as a medical emergency or divorce throws you into chaos, high credit card balances can become a symptom of the underlying problem. Ninety percent of people who file bankruptcy have relatively modest credit card debt – averaging $2,500. While this is still a good amount of money, it's not exorbitant, and is not a significant enough reason to file for bankruptcy. But combined with other financial issues, it can add up to enough debt to warrant considering bankruptcy. And when it comes to credit cards and bankruptcy, you need to be careful about timing and perception.

Credit Card Conundrum                      

If you’re worried about losing all of your credit card accounts in your bankruptcy – because you can’t imagine life without plastic in your wallet – you may consider paying them off prior to filing in hopes you can keep one (or all of them). Any ordinary debt payments of $600 or more made for car loans, credit cards or mortgages must be reported on your petition if they were made within 90 days prior to your bankruptcy filing.

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If you attempt to zero out your balance prior to filing, this could be seen as preferential payment and could be considered suspicious. The law says all creditors should be treated equally and singling out a particular debt to pay off could cause issues. The Trustee can actually ask that a creditor that received a preferential payment to return the money so it can be redistributed evenly between all creditors.

Zero Balance Cards

If you have a credit card with a zero balance, you likely would like to hang onto it post-bankruptcy in case of an emergency, for travel purposes or to help you rebuild your credit. While the Bankruptcy Code could be loosely interpreted to say that you aren't required to report your zero balance card on your petition because it is not, by definition, a “debt” that just means that the creditor won't receive notice of your filing from the court.

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However, your bankruptcy is public record and credit card companies run periodic credit reports as a matter of form. Your bankruptcy filing will be reflected on your credit report and once the card provider becomes aware of the filing through a routine credit update, they will more than likely cancel your zero balance card.

Final Thoughts

If you have a zero balance card that you want to keep because you need it for emergencies or are required to have a credit card for travel for work, you'll need to talk to your North Carolina bankruptcy attorney about your options. Contact the law offices of John T Orcutt for advice on this and other bankruptcy topics at your free initial consultation!