Can I Keep My Credit Cards in Chapter 13?

Chapter 13 bankruptcy offers individuals with consistent income a structured pathway to manage and repay their debts. This legal process enables debtors to reorganize financial obligations under court supervision. A common concern for those considering this option involves understanding how credit cards are affected throughout the bankruptcy proceedings. The Chapter 13 framework focuses on debt restructuring, allowing individuals to retain assets while committing to a repayment plan.

Treatment of Existing Credit Accounts

Upon filing for Chapter 13 bankruptcy, existing credit card accounts are significantly impacted. Credit card debts are typically categorized as unsecured debts. An automatic stay goes into effect, legally prohibiting creditors from pursuing most collection activities like calls, letters, lawsuits, and wage garnishments.

Creditors are notified of the bankruptcy filing, and credit card companies typically close or freeze accounts. This prevents further use of the cards. Using an existing credit card after filing for bankruptcy can be interpreted by the court as bankruptcy fraud or a violation of court orders, potentially leading to case dismissal.

Credit card debts are integrated into the Chapter 13 repayment plan, which typically spans three to five years. These unsecured debts usually hold a lower priority than secured debts like mortgages or car loans, or priority debts such as recent taxes and child support. The amount paid to credit card companies depends on disposable income and the “best interest of creditors” test, ensuring unsecured creditors receive at least what they would in a Chapter 7 liquidation. Any remaining balance is discharged upon successful completion of the plan.

Most traditional credit cards are unsecured and treated as part of the overall unsecured debt pool in the Chapter 13 plan. Secured credit cards, backed by a cash deposit, are treated differently due to their collateral and may need to be paid at a higher priority if the debtor wishes to retain them.

Obtaining New Credit During Chapter 13

Acquiring new credit, including credit cards, while under an active Chapter 13 repayment plan requires court permission. This authorization is sought through a “motion to incur debt.” Court approval ensures new financial obligations will not jeopardize the debtor’s ability to complete their repayment plan.

The bankruptcy court and trustee review these motions, assessing if the proposed new debt is necessary, reasonable, and affordable within the debtor’s financial structure. The court protects both the debtor’s financial recovery and existing creditors’ interests. Incurring new consumer credit without prior court or trustee approval can lead to case dismissal, meaning the debtor would not receive a discharge and would remain liable for all debts.

Traditional, unsecured credit cards are difficult to obtain during Chapter 13. Approval is rare as they represent increased risk to lenders and conflict with the plan’s debt reduction goal. The court discourages new unsecured debt that could undermine the repayment schedule. Obtaining such credit without authorization may be viewed as an inability to comply with plan terms.

Secured credit cards may present a more viable option for debtors seeking to rebuild credit. A secured credit card requires a cash deposit as collateral for the credit limit, minimizing lender risk. These cards are viewed more favorably and may be permissible with court or trustee approval. Utilizing a secured card can help a debtor establish a positive payment history without incurring debt that could derail their Chapter 13 plan. Some local court rules may allow for small limit secured credit cards without a formal motion, depending on the specific dollar amount cap.

Financial Management During Your Plan

Successfully navigating a Chapter 13 plan requires disciplined financial management and a shift away from reliance on credit. Adhering to a budget is essential, aligning spending with repayment plan requirements. This involves tracking income and expenses to ensure sufficient funds for monthly payments to the bankruptcy trustee.

For daily transactions, using debit cards and cash becomes the primary payment method. This avoids new debt and reinforces responsible spending habits, shifting focus to living within current income.

Making timely payments to the Chapter 13 plan contributes to future credit rebuilding. Consistent, on-time payments demonstrate financial responsibility to credit reporting agencies, gradually improving a debtor’s credit profile. While bankruptcy remains on a credit report for up to seven years, positive payment history during the plan can mitigate its impact.

Building an emergency fund, even a small one, is a strategy to manage unexpected expenses without resorting to new credit. Having a reserve helps prevent financial disruptions that could jeopardize plan payments. Addressing potential financial shortfalls ensures successful completion of the Chapter 13 plan, leading to long-term financial recovery and new credit opportunities.