Credit cards and bankruptcy – common issues

What happens to credit card debt in bankruptcy?

Credit card debt is typically unsecured debt.  Unsecured debt means that the debt is backed by your promise to pay.  On the other hand, secured debt is backed by an asset such as a car or house, which can be repossessed or foreclosed upon after non-payment.    A holder of an unsecured debt very well may be able to seize some of your property, but can usually only do so after filing and winning a lawsuit against you.

For most bankruptcy filers credit card debts are completely wiped out or are significantly reduced.  Although credit cards are typically easy to wipe out, this does not mean that you can run up your credit cards right before filing for bankruptcy and expect to wipe out the debt.

What happens if I run up credit cards right before bankruptcy?

If you use your credit cards without the intent to pay it is considered fraudulent.  Debts that are induced by fraud cannot be discharged in bankruptcy.  As discussed more fully below, bankruptcy laws provide some rules that determine what sort of spending is presumed to be fraudulent.   These rules can easily come up in the context of credit card charges.

Recent Cash advances over a certain amount probably won’t be discharged

If, within 70 days before you file bankruptcy, you take out cash advances on any one credit card in the total amount of over $925.00, you will probably still owe those amounts.

Debts for luxury items

If, within 90 days before filing bankruptcy, you charge more than $650.00 to any one creditor for luxury goods or services, those charges will likely survive your bankruptcy.  Luxury items are goods and services not necessary for the support of you or your family.  Luxury goods and services include things such as vacations, expensive clothing, jewelry, sporting goods, recreational vehicles.

Example:  You run up a credit card taking a trip to New Orleans to watch the Saints play.  You charge the tickets, a fancy hotel room, and nice meals. The total charged to the one card you used was $700.00.  You file for bankruptcy 89 days later.  Although your other credit card debt is discharged, you will likely still have to pay back the $700.00 spent on the trip.

What about balance transfers

A balance transfer from one credit card to another will likely be considered an avoidable preference.  This essentially means that you treated one creditor better than the other by using a debt to one to pay off a debt to another.  As between credit cards, these transactions can be undone or avoided if certain criteria are met.  This does not mean that you are liable.  This becomes a dispute amongst the credit card companies to determine who will take the loss.

Can I keep a credit card in bankruptcy?

While you will likely lose the credit cards you have in bankruptcy, credit card offers typically come in droves after a bankruptcy.

A common worry is that a credit card is needed for emergencies and everyday purchases.  Many want to leave a credit card out of the bankruptcy believing that they may not be able to get credit after filing.  For that reason, individuals sometimes want to leave a credit card off of their bankruptcy schedules.  If you owe money on a credit card at the time you file for bankruptcy protection, you must list it on your bankruptcy schedules.  When you file your bankruptcy schedules, you affirm, under penalty of perjury that all of your debts are listed.  If the court learns that you failed to list a debt, you could be denied the discharge of your debts.

Even if you were to keep a card, it may very likely be cancelled after filing your bankruptcy anyway.  Many credit card issuers get automatic alerts of all bankruptcies filed.  Common language in a credit card agreement allows the issuer to cancel the card in the event of a bankruptcy filing.

If you are set on keeping a certain credit card, you can probably do so with what is called a reaffirmation agreement.  With a call to the issuer and entry into a reaffirmation agreement you will likely be able to keep a particular card if you want and if the creditor is agreeable.   Keep in mind that by reaffirming a particular debt means that you agree to continue paying the debt and that debt will not be discharged in bankruptcy.

Credit cards after bankruptcy

Most anyone who has filed for bankruptcy protection can tell you that shortly after completing the bankruptcy case, piles of new credit card offers arrive in the mail.   Why is this?

First off, the amount of debt you have will be dramatically reduced.   Potential creditors recognize that you now have more ability to pay a new loan since you are no longer burdened by the debts you once had.

Potential creditors also realize that you will not be able to get another bankruptcy discharge for a certain number of years.  Depending on the type of bankruptcy, this could be as many as eight years where the credit card issuer doesn’t have to worry about you getting bankruptcy discharge.

Credit card issuers may also see you as someone who tends to run a balance and incur penalties.  High interest and penalty fees are an area that is extremely profitable for credit card companies.   Many companies line up to offer credit to the recent bankruptcy filer in hopes of entering into a relationship that is profitable for them.  For most credit scores will also start to improve shortly after filing bankruptcy.  With better credit scores comes the availability of credit.

Whatever the creditor’s reasons, the fact is that you will likely receive a large number of credit card offers shortly after completing your bankruptcy.

Use it wisely

After bankruptcy some individuals want nothing to do with credit cards.  The wise use of credit cards, post bankruptcy, can help you more quickly re-establish your credit.  To do this, though, you must use the credit cards wisely and with discipline.   To rebuild credit more rapidly after bankruptcy, you should only use your credit cards for small purchases that you can afford to pay in full each month.  By limiting your charges and paying the balances in full each month demonstrates responsibility and discipline to creditors and will likely help improve your credit score.

We can help advise you about credit card debt and credit card use leading into bankruptcy. To schedule an initial free and confidential consultation to discuss your particular situation call 601-853-9966.