We understand that as inflation keeps rising so does the gap to make ends meet. Many people have no choice but to rely on their credit cards to get through the month. Clients from Gilbert and Phoenix, contact our Mesa bankruptcy attorney regularly with many questions about filing. However, one of the most common is whether or not they can keep a credit card or two after filing bankruptcy.
The security of having one or two cards available in the event of an emergency would make filing bankruptcy a “no-brainer.” Furthermore, it’s a fairly legitimate question, because it can potentially take years to qualify for a decent credit card again after a bankruptcy. Let alone one with a favorable interest rate and perks.
While it might seem reasonable that you be allowed to keep a card that has no balance on it, or one that has a small and manageable balance. Unfortunately, bankruptcy law and lender policies aren’t quite that straightforward.
It is possible to keep a favorite card through a bankruptcy, but you must take some specific steps. Final decision will ultimately be up to the lender, but making the correct course of action will significantly increase your chances.
Chris Dutkiewicz has been practicing bankruptcy law for over 14 years right here in the East Valley. He is highly sought after for his expertise, knowledge and non-judgmental attitude. Chris has filed thousands of Chapter 7 bankruptcies and is one of the best Arizona bankruptcy attorneys. Get a FREE Consultation.
CHAPTER 13 vs. CHAPTER 7
The two major types of personal bankruptcy in Arizona are Chapter 7 and Chapter 13. Chapter 7 is, in general, for large amounts of unsecured debt that you have no realistic expectation of being able to repay. Chapter 13 is for debtors who have means such that they can reasonably be expected to pay back at least part of their debt.
Chapter 7 requires that a trustee is appointed to liquidate any eligible assets the debtor owns, while Chapter 13 allows debtors to keep those assets so long as they can pay an equivalent amount to their creditors. That does leave the door open to potentially keep a credit card open while paying it off under a repayment plan. The main issue with this scheme is that credit card debt gets the lowest priority of all the debt types in a Chapter 13 arrangement. It is the type most eligible to be discharged without having to pay it back, but that also means the card will be closed.
Ironically, having a zero balance on a credit card when you file for a Chapter 13 bankruptcy all but guarantees its closure. That’s because a term of the repayment program is that you cannot accrue non-essential debt until you complete the plan. There is a small possibility that a lender could freeze an account for the duration of the payment plan, but most lenders do not offer this as an option.
Although Chapter 7 has a more substantial impact on your credit, it’s the more natural path to keeping a credit card, provided you can get it down to a zero balance or a low amount that the creditor is confident you can pay off.
KEEPING A CREDIT CARD WITH A BALANCE UNDER CHAPTER 7 BANKRUPTCY?
An early step in filing for bankruptcy is listing all of your debts for the court. You’re required by law to do this, and all of these creditors must receive a notice that you are filing for bankruptcy.
Once they receive this notice, it’s usually only a matter of time before they close your account. However, there is a process called “reaffirmation” that can be employed to keep your card.
Reaffirmation means you let the creditor know you’re filing for bankruptcy, but sign an agreement with them to exclude that specific debt. You must complete this process before the bankruptcy case ends. Credit card companies will be receptive to reaffirmation, as it means they’ll have a chance of recovering money that otherwise would have been a total loss for them. The longer and better your history is with the lender, the better your chances are.
However, the court can opt not to allow a reaffirmation even if the creditor agrees to it. The court will block a reaffirmation if it believes that the debt will create a new hardship for you given your current means; that’s why it’s vital to get the debt as low as possible before starting bankruptcy proceedings.
Large payments to one credit card company just before a bankruptcy filing can be a problem, however. One term of a bankruptcy is that all of your creditors are supposed to get fair treatment. Creditors, who get to review your debts and payment history as part of the proceedings, can object to the bankruptcy if they feel unfairly treated. Paying off one balance while others go without payment can trip up your bankruptcy eligibility. If you want to hang on to a card this way, it’s best to make sure the balance is low well in advance of filing — six months at a minimum.
KEEPING A CREDIT CARD WITH NO BALANCE UNDER CHAPTER 7?
As mentioned earlier, you have to list your debts for the court as part of a bankruptcy proceeding. There is nothing in the United States Bankruptcy Code that specifies you must include a credit card that currently has no balance on it since that’s not a debt.
The credit card company may not learn about your bankruptcy while the case is pending, but once the court approves it, it hits your credit report. They’ll find out about it then and may cancel the card automatically even if you don’t owe anything. It’s entirely at the discretion of the lender.
Check the agreement they sent you when you first received the card; somewhere in the terms, you may find a clause that stipulates automatic account closure upon entering bankruptcy regardless of the balance. Lenders don’t always cancel cards with a zero balance, however. There is much anecdotal evidence of cards continuing to function after being carried through bankruptcy with a zero balance; the smaller the credit limit and the more “off-brand” they are (like a store-specific card), the better their chance of surviving.
CAN YOU KEEP THAT CARD?
Your best shot at hanging on to a favorite credit card through bankruptcy is to get the balance Low enough to be manageable as far in advance of filing for bankruptcy if possible. Then file under Chapter 7 and get the lender to agree to a reaffirmation deal that allows you to keep the card open.
If the lender doesn’t have terms in their agreement about automatically canceling the card in the case of bankruptcy, you might get away with just paying it off in full (well in advance of filing with the court) without mentioning it as part of the proceedings. You could always give an anonymous call or email to your lender’s customer service department to see if they can quote specific policy on the matter.
While the bankruptcy process can be confusing and even embarrassing for some clients. It’s what DM Bankruptcy Law Group does best. We’re compassionate, sincere and want to help you get out of debt so you can get back to living. If you’re in Mesa, Gilbert, Queen Creek or Phoenix, contact us for a complimentary case consultation.
DISCLAIMER: None of the content in this post shall be construed as legal advice to you, the reader, and no attorney/client relationship is formed by reading this post.