Can I Keep a Credit Card In My Chapter 7 Bankruptcy?

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.

Why a Credit Card Company Will Cancel Your Card When You File for Bankruptcy

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.

Listing Credit Card Debts

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.

Losing Unused Credit Cards

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.

Your Corporate Credit Card in Chapter 7 Bankruptcy

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.

Authorized Credit Card Users Who File for Chapter 7

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.

Credit Card Obligors Who File for Bankruptcy

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.

Why You'll Be Offered a Credit Card After Chapter 7 Bankruptcy

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:

• Bankruptcy wipes out your credit card debt, giving you more discretionary income to pay bills.
• Most people use credit cautiously after bankruptcy because they don't want to find themselves in the same predicament (and tend to refrain from using credit for frivolous purchases).
• The credit card company knows you can't file for Chapter 7 bankruptcy for another eight years, so there is lots of time to collect against you, if necessary.

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.

How to Rebuild Your Credit After Bankruptcy

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.

Paying Credit Cards After Bankruptcy

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:

• The amount of credit available on your account strongly influences your credit score. For instance, your credit score will be much higher if you have $3,000 in available credit compared to only $300.
• Using a significant amount of outstanding credit, especially suddenly, will sometimes trigger a creditor to lower available credit. You can expect this to occur more frequently in economic uncertainty when creditors attempt to decrease potential losses.

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.

Avoiding Small Credit Card Limits After Bankruptcy

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.

Using Credit Cards Frequently After Bankruptcy

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.

Other Ways to Rebuild 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 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.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.