If you file for Chapter 7 bankruptcy and hope to hang onto one of your credit cards, you will likely be out of luck. Once your credit card company learns of your bankruptcy, it will almost certainly cancel your card. Find out why you can't keep credit cards when filing for bankruptcy and how to get another credit card later.
When preparing to file for bankruptcy, it is typical for a potential filer to want to "exclude" a particular debt from the bankruptcy petition, such as a credit card used for work expenses or a beloved pet's medical expenses. No matter how important the card might be, excluding debt is not an option when you file for Chapter 7 bankruptcy.
Bankruptcy law requires you to list all debt on your bankruptcy petition without exception. In other words, if you owe a creditor money, the creditor must appear on your petition. Learn more about information you must include in your bankruptcy papers.
A revolving credit card account is a type of contract, and your contracts are automatically canceled by bankruptcy, including credit cards, leases, and secured auto loans, to name a few. 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.
Chances are, if your employer provides you with a credit card to pay for travel expenses or supplies, you're either an authorized user or an obligor on the account. The distinction matters because it will determine whether you must include the account in your bankruptcy paperwork. Here's what to expect.
If you're an authorized user, business-related charges will often be billed to the company directly. Because the account isn't in your name, you won't include it in your bankruptcy. You should also be able to continue using the card.
If you're an obligor on the account, you and your employer are likely jointly responsible for paying the balance. You probably pay the credit card bill and seek reimbursement from your employer afterward.
Suppose there's a balance on the credit card account when you file for Chapter 7 bankruptcy. In that case, you must list it on your bankruptcy paperwork, and the credit card issuer will probably close the account.
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 the Chapter 7 bankruptcy closes, you can start 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. Here's why:
Of course, getting a credit card soon after bankruptcy isn't a wise choice for everyone. You are in the best position to decide what will work for you.
Credit reporting bureaus reward people who can responsibly handle the typical credit mix that most households maintain, including one or two unsecured credit cards, and a car loan. It's also usual to have a secured credit account, such as a furniture or jewelry store card. Car loans, furniture accounts, and jewelry store cards are "secured" because you must promise to return the merchandise if you fail to make payments.
Learn about the differences between secured and unsecured debts.
Once you have the right credit mix, making timely payments is paramount. Also, you'll want to pay your balances down to 10% to 30% of your available credit each month but not pay off the card. Paying off your entire balance could trigger the credit card company to pull your credit, and every time that happens, your credit takes a hit.
Other reasons why it's not a good idea to use more than 30% of your available credit include the following:
Also, a heftier amount of available credit will allow you to use your card for everyday purchases, such as groceries and utility bills. Using the card for these purposes can efficiently rebuild your credit.
You'll want to open cards with the largest limits possible and pass up cards offering smaller limits. Credit cards with lower credit lines of $500 or less can hurt your score because you'll never have much available credit.
Credit card companies like it when you make money for them. When you use your card regularly and pay it down, but not off, each month, you put a lot of money in the credit card company's coffers. Each time you use it, the store must pay the credit card company a percentage of your purchase. To encourage you to keep making the company money, the credit card company will likely increase your credit line surprisingly quickly.
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 to a 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.
Learn additional ways to rebuild credit in Steps to Cleaning Up Your Credit Report.
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