Understanding the Impact of Bankruptcy on Your Credit Cards

Bankruptcy can be a daunting process, and one of the many concerns people have is what happens to their credit cards. At O1ne Mortgage, we understand the complexities of financial distress and are here to help you navigate through it. If you have any mortgage service needs, feel free to call us at 213-732-3074. In this blog, we will explore the effects of bankruptcy on your credit cards and provide some insights on how to manage your financial future post-bankruptcy.

What Happens to Your Credit Cards After Bankruptcy?

When you file for bankruptcy, whether it’s Chapter 7 or Chapter 13, your credit card accounts are affected in similar ways. Chapter 7 involves liquidating certain assets to pay off debts, while Chapter 13 requires you to make regular payments to creditors. Regardless of the type, your credit card accounts will likely be canceled.

Accounts With Balances Must Be Listed as Creditors

One of the first steps in any bankruptcy proceeding is to provide the court with a list of all your creditors, which includes all your credit cards, even those with no balances. All issuers of credit cards with unpaid balances will be notified of your bankruptcy filing, and most will cancel your account upon receiving this notice.

Cards With Zero Balances Will Likely Be Canceled

Even if a credit card has no balance, it’s not considered a debt, so the bankruptcy court may not notify the issuer. However, credit card issuers routinely monitor customers’ credit reports and will likely cancel your account if they see a bankruptcy filing. For many lenders, a bankruptcy on your credit report is sufficient grounds for canceling your account, even if they don’t stand to lose money.

Reaffirming Credit Card Debt in Bankruptcy

Federal law allows you to exempt certain debts from being discharged, a process known as reaffirming the debt. This is usually done to keep essential assets like a house or car. While it’s theoretically possible to reaffirm credit card debt, it’s generally not advisable. Here’s why:

• Credit card issuers may still close your account even if you reaffirm the debt.
• Credit card debt can quickly accumulate due to compound interest and low minimum payments, making future payments unpredictable.
• You must convince the court that you can afford to repay the reaffirmed debts and that it’s in your best interest not to discharge them. Judges rarely see the benefit in retaining credit card debt.

Chapter 13 Bankruptcy and Credit Cards

In Chapter 13 bankruptcy, eligible debts are discharged only after a three- to five-year period of making monthly payments to your creditors. During this period, a credit card won’t be of much use because you must get court permission before taking on any new debt, including credit card charges. Borrowing is limited to a total of $1,000 over that period, except for emergencies.

What About Authorized-User Accounts?

If you are an authorized user on a credit account, you are not legally responsible for any balance on the account and do not have to include the card in the list of creditors you submit to the bankruptcy court. The court won’t notify the issuer of your bankruptcy, and the account owner’s credit standing will not be affected. However, if you owe your employer reimbursements for charges made on a company card, you must list the company as a creditor, and they will be notified of your bankruptcy.

If an authorized user on an account you own files for bankruptcy, there will be no indication of that on your credit report. Any unpaid balances they may have run up are your responsibility.

Does Filing for Bankruptcy Clear Your Credit Card Debt?

Yes, unsecured consumer debt, which includes unpaid credit card balances, is subject to discharge in bankruptcy. This means that once your bankruptcy is finalized, you are no longer legally obligated to pay those debts.

Do I Have to List All My Credit Cards When I File Bankruptcy?

Yes, you must list all your open credit card accounts as creditors, even those with zero balances. The bankruptcy trustee assigned to your case needs to know about them because they typically review activity on all accounts in the months preceding your bankruptcy filing to check for “preferential payments.” If you made disproportionately high payments to a single creditor before filing, the trustee can order that creditor to return the money so it can be distributed more evenly among all your creditors.

Can You Keep Any Credit Cards After Filing for Bankruptcy?

It is legally possible to keep a credit card after bankruptcy if it has no balance at the time of your filing and the issuer chooses not to cancel it. However, these instances are rare, as many credit card contracts call for card cancellation in the event of bankruptcy, even if there is no monetary loss on the account.

The Bottom Line

While it’s unlikely you’ll be able to keep a credit card after bankruptcy, you will be able to get a new card eventually—and perhaps sooner than you’d think. A Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date, and a Chapter 13 persists for seven years, but their negative impact on your credit scores lessens over time.

Many bankruptcy filers start receiving credit card offers within a year or two of filing. These offers typically come with high interest rates and modest borrowing limits, but using them responsibly can help you rebuild a positive payment history, improve your credit scores, and eventually qualify for more attractive credit offers.

You can even jump-start the credit recovery process more quickly with a secured credit card. With a secured card, you put down a cash deposit, which usually serves as your credit limit, and which the lender can keep if you stop making payments. Making purchases and maintaining timely payments on a secured credit card account benefits your credit history and can help improve credit scores bruised by bankruptcy.

To keep tabs on your credit health, consider using credit monitoring services. These services can alert you to any changes to your credit report and credit score, helping you stay informed and proactive in your financial recovery.

At O1ne Mortgage, we are committed to helping you navigate through financial challenges. If you have any mortgage service needs, don’t hesitate to call us at 213-732-3074. We are here to assist you every step of the way.