Can I Keep Credit Cards in Chapter 13?

Chapter 13 bankruptcy provides individuals with regular income a structured path to reorganize their debts and establish a manageable repayment plan. This process, typically lasting three to five years, allows debtors to retain their assets while making consistent payments to a trustee. A common question during this period concerns the use and status of credit cards, as their treatment is significantly impacted by the bankruptcy filing.

Existing Credit Cards During Chapter 13

Upon filing for Chapter 13 bankruptcy, an automatic stay immediately takes effect, halting most collection efforts by creditors. While the automatic stay freezes these efforts, it does not eliminate the credit card debt itself. Instead, credit card companies are notified of the bankruptcy filing and close accounts immediately.

Credit card debts are categorized as unsecured debts in Chapter 13 bankruptcy, meaning they are not backed by collateral. These unsecured debts are included in the Chapter 13 repayment plan. The amount repaid to unsecured creditors can vary significantly, sometimes being “pennies on the dollar” or even nothing, depending on the debtor’s disposable income and the “best interest of creditors” test. Secured credit cards, backed by a cash deposit, are treated differently. Keeping a secured card typically requires paying the balance, plus interest, over the plan’s term as part of the repayment plan.

Debit cards are unaffected by a bankruptcy filing. Credit cards extend a line of credit subject to the bankruptcy process. Using an existing credit card after filing for bankruptcy, even if the account has not been officially closed, is prohibited and can lead to consequences, including case dismissal. Avoid incurring new debt on any existing credit line after filing, as such debt may not be dischargeable and could violate court orders.

Obtaining New Credit During Chapter 13

Acquiring new credit while a Chapter 13 plan is active is subject to rules and often requires court approval. Debtors are not permitted to incur any significant new debt without permission from the bankruptcy judge or the Chapter 13 trustee. This requirement applies to various forms of credit, such as auto loans, mortgages, and even secured credit cards. The court’s concern is ensuring that any new debt will not jeopardize the debtor’s ability to complete their repayment plan.

Obtaining new unsecured credit cards during Chapter 13 is difficult and discouraged. The purpose of Chapter 13 is to help debtors repay pre-existing debts and achieve a fresh financial start, and taking on new unsecured debt can undermine this goal. While challenging, certain types of credit may be considered with court approval, particularly for essential needs. For instance, obtaining an auto loan for necessary transportation or a mortgage for housing might be approved if the debtor can demonstrate a need and the ability to make the new payments without disrupting their Chapter 13 plan.

Secured credit cards, which require a cash deposit, may present an option for rebuilding credit during or after Chapter 13. These cards are easier to obtain than unsecured cards for individuals with lower credit scores. Even for a secured card, consideration and court permission are necessary to ensure it aligns with the repayment plan. Before attempting to incur any new debt, debtors should consult with their bankruptcy trustee or attorney. They can provide guidance on the requirements for court approval and help navigate the process, which often involves filing a motion with the court. Incurring unauthorized debt can lead to consequences, including the dismissal of the bankruptcy case.

Financial Tools and Budgeting in Chapter 13

Given the limitations on credit card use during Chapter 13 bankruptcy, debtors must rely on alternative financial tools for managing daily expenses. Debit cards remain usable and are a means for conducting transactions without incurring new debt. Prepaid cards and cash also serve as alternatives for managing spending. These tools help debtors maintain financial control and avoid the temptation of credit.

The Chapter 13 repayment plan itself serves as a structured budget. Adhering to this court-approved plan is important for financial management during bankruptcy. Debtors are required to devote all their “disposable income” to the repayment plan. A step for successful completion of the plan is developing and following a personal budget that aligns with these requirements. This involves tracking income and expenses to ensure that monthly payments to the trustee can be met.

Effective budgeting post-filing involves categorizing spending into essential and non-essential items, requiring adjustments to lifestyle to prioritize necessary expenses. This approach helps prevent financial shortfalls that could jeopardize the repayment plan. As part of the bankruptcy process, individual debtors are required to complete a financial management course. Maintaining open communication with the trustee and attorney about any financial changes is important, as they can provide guidance and potentially help modify the plan if circumstances change.