If you file for Chapter 7 bankruptcy and hope to hang onto one of your credit cards, you'll likely be out of luck. Once your credit card company learns of your bankruptcy, it will almost certainly cancel your card. This article explains what you need to know about Chapter 7 bankruptcy and credit cards, including why you can't keep personal credit cards when filing for Chapter 7 bankruptcy, and when you can keep a corporate credit card. You'll also learn the steps involved in getting credit after bankruptcy so that you can rebuild your financial standing.
For many, the thought of filing for bankruptcy feels overwhelming, and it's understandable—filing for bankruptcy is a significant and often stressful event. When preparing to file for bankruptcy, it's common for potential filers to wish they could "exclude" a particular debt from their bankruptcy petition, perhaps a credit card used for work expenses or a beloved pet's medical care.
However, no matter how important a specific card might seem, excluding personal credit card debt isn't an option under bankruptcy law. While this might seem challenging now, there are ways of overcoming a credit card loss, and most people who file agree that the practical benefits of erasing debts with a debt discharge far outweigh the temporary inconveniences.
Bankruptcy law requires you to list all debt on your bankruptcy petition without exception. (11 U.S.C. § 521.) In other words, if you owe a creditor money, that creditor must appear on your petition, even if the account has a zero balance or hasn't been used recently. This requirement ensures fair treatment of all creditors and a complete discharge of eligible debts, providing you with a true "clean slate." Learn more about where to get forms needed for Chapter 7 and what information to include in them.
A revolving credit card account is a type of contract. Under bankruptcy law, these contracts are canceled automatically. This applies not only to credit cards but also to leases, secured auto loans, and other similar transactions. Once your credit card company pulls your credit report and learns about the bankruptcy, it will likely cancel your card. Why? Because without a valid agreement, the credit card company can't make you pay for your purchases.
Bankruptcy works by discharging the contract between you and the creditor. Not only do creditors lose the ability to collect charges incurred before the bankruptcy filing, but the lack of a valid contract could also make collecting any charges going forward difficult. (11 U.S.C. § 524(a).)Even if that weren't an issue, most creditors are hesitant to offer new credit to someone newly exiting bankruptcy due to the increased financial risk.
The rules differ for corporate or employer-provided credit cards, depending on your relationship to the account.
To ensure a smooth Chapter 7 bankruptcy process and avoid potential legal complications, it's crucial to be aware of specific actions to avoid with your credit cards in the period leading up to your filing. These actions could lead to allegations of bankruptcy fraud or other issues that might prevent certain debts from being discharged.
Many people wonder if they can use their credit cards for living expenses or even luxury purchases before filing for bankruptcy. The law allows creditors to object to the discharge of recent debts if they believe you used credit knowing you wouldn't repay (11 U.S.C. § 523(a)(2)).
Basic, necessary expenses, like food, gas, and utility bills, are less likely to be considered fraud, especially if you have a genuine need. However, keep detailed receipts in case the trustee or a creditor questions the charges. You'll want to be prepared to prove that the purchases weren't made fraudulently.
Learn more about why you should avoid running up credit cards before filing for bankruptcy.
Here are a few other things about credit cards that you'll want to be aware of before filing for Chapter 7.
Caution. Before making significant financial decisions before bankruptcy, consult an experienced bankruptcy lawyer for advice regarding your circumstances. Doing so can help you avoid common pitfalls.
Even though you lose your cards during bankruptcy, you'll still be able to obtain a credit card after filing—possibly sooner than you might think. Once your Chapter 7 bankruptcy closes, you can begin rebuilding your credit. Many people receive new credit card offers in the mail within months of receiving their Chapter 7 discharge. While this might seem surprising, it will make sense once you understand why credit card companies will consider you a reasonable risk:
Caution. These initial offers often come with high interest rates and annual fees. Compare options carefully before applying.
Rebuilding your credit after bankruptcy requires time, a plan, and knowing the types of actions credit reporting bureaus reward. Most indicate that the best approach is to have a varied credit mix, which would include one or two unsecured credit cards—typical major cards that aren't secured by money in a bank account, the property you purchase with it, or your home equity—and an installment loan that is paid in a particular number of months, like a car loan.
Typically, you'll be offered an unsecured credit card shortly after bankruptcy, which will have a relatively low credit limit and a high interest rate. As a general rule, try to hold out for a card with a larger credit limit, because it's the available credit amount that increases your score. A card with $300 limit won't do much to help your score and might hurt it. You'll find more tips in the "What to Look for in Postbankruptcy Credit Offers" section below.
If you don't receive unsecured credit card offers, there's another approach you could take. Consider a secured credit card, where the available credit is determined by the amount of funds deposited with the company. That might be where you need to begin after bankruptcy.
You likely know what you would change about your credit habits after bankruptcy—and the tendency is likely to stay far away and avoid falling into debt again. Your instincts are good because, ultimately, the credit bureaus reward paying off balances, rather than carrying them month to month. So the goal is to use them wisely.
Tip. One of the easiest and most successful approaches to using a credit card responsibly is to use it for monthly household bills, such as electricity, water, gas, internet, cellphone services, and auto insurance. Have the companies automatically charge your credit card each month and make one credit card payment rather than four or five separate utility charges. You could use a separate credit card for groceries and small purchases. Another added benefit? You have protection against fraudulent use.
The following is a short list you can refer to when rebuilding credit after bankruptcy.
Following the techniques outlined above will help increase your credit line. Your available credit will follow, driving up your credit score. You can also ask a trusted family member with a high credit score to add you as an authorized user to their credit account. It works to increase your score without your participation.
If you rent or lease, your landlord might participate in a reporting program that rewards you with timely monthly payments. You might be able to include utility payments, as well. Discover additional ways to rebuild your credit in 'Steps to Cleaning Up Your Credit Report'.
Below you'll find answers to questions you might have about your credit cards.
Generally, no. Even if you managed to receive one before the Chapter 7 filing appeared on your credit, the lender would likely revoke it as soon as they found it through routine credit monitoring.
You can use credit cards for essentials before filing for bankruptcy, but to avoid fraud allegations, you'll want to avoid purchasing luxury items and taking out cash advances. Another approach is to check with local assistance agencies for help with food and utilities. Some bankruptcy attorneys provide local program information.
Qualifying for a secured credit card requires depositing money—for example, $300—to protect the lender from loss. The deposited amount sets the credit limit. By contrast, an unsecured credit card doesn't require a deposit.
Many people receive unsecured credit offers shortly after bankruptcy. If you don't, explore options online. Suppose you don't receive any and must start with a secured card. In that case, it will likely take a year or two to qualify for an unsecured card, depending on the lender's requirements.
Most people are surprised to learn that, if you meet the income requirements and work to rebuild your credit, you can qualify as soon as two to four years after receiving your bankruptcy discharge. Learn more about getting a home loan after bankruptcy.
Every year, you're entitled to free credit reports from each of the three major credit bureaus—Experian, TransUnion, and Equifax—through AnnualCreditReport.com. A good practice is to order a report from one of the bureaus every four months, rotating through the bureaus over the course of the year. Each period, check for incorrect reporting and unusual accounts or activity.
Yes. Here are the steps refined down to an easy-to-follow process:
Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program.
However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
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