Can You Keep a Credit Card in Chapter 11?
Understand how Chapter 11 affects your credit cards: existing accounts, future credit, and debt resolution.
Chapter 11 bankruptcy provides a structured pathway for businesses, and sometimes individuals with substantial debts, to reorganize their financial affairs under court supervision. This process allows debtors to continue operations or manage finances while developing a plan to repay creditors. A common question is how Chapter 11 impacts credit cards, both existing and new ones.
Existing Credit Accounts in Chapter 11
Upon filing for Chapter 11 bankruptcy, an “automatic stay” immediately takes effect, halting most collection activities by creditors. Despite this stay, credit card accounts are typically frozen or closed by their issuers once they receive notification of the bankruptcy filing. This is a practical measure to mitigate financial risk, as bankruptcy terminates existing financial contracts.
Credit card debt is generally unsecured. Once a bankruptcy petition is filed, the credit card company becomes a creditor in the bankruptcy proceedings. Continued use of these cards would complicate the reorganization process and could violate equitable treatment among creditors.
Debtors are required by federal law, 11 U.S.C. Section 521, to disclose all existing debts, including credit card accounts. Failing to list all creditors can lead to serious consequences, such as case dismissal. It is crucial to cease using existing credit cards immediately upon filing, as any new charges incurred post-petition could be subject to court scrutiny and deemed non-dischargeable.
Card issuers almost always terminate privileges upon notice of a bankruptcy filing. This is a practical measure to mitigate financial risk, as the bankruptcy filing effectively terminates existing financial contracts. Both personal and business credit cards are generally included in the bankruptcy estate and subject to this treatment.
Obtaining New Credit During Chapter 11
Obtaining new, unsecured credit for personal use while under Chapter 11 protection is very difficult. Lenders are risk-averse when extending credit to debtors in bankruptcy. Incurring new personal debt usually requires court approval.
For businesses, new financing may be necessary to continue operations and facilitate reorganization. This is often achieved through “Debtor-in-Possession (DIP) financing,” which requires court approval under U.S. Bankruptcy Code Section 364. DIP financing provides working capital, allowing the business to fund ongoing operations and cover essential expenses. Lenders providing DIP financing are often granted priority status over pre-petition debts, making such loans more attractive. This priority helps ensure the new credit can be repaid.
For individuals, obtaining new credit, especially unsecured credit cards, remains highly challenging. Securing new credit, such as a secured credit card backed by a cash deposit, typically requires court approval. The court supervises the debtor’s financial activities to ensure they align with reorganization goals.
Resolution of Credit Card Debt in Chapter 11
All pre-petition credit card debt is listed as part of the debtor’s liabilities and addressed within the proposed reorganization plan. Credit card companies are treated as general unsecured creditors, meaning their claims are not backed by specific collateral.
The Chapter 11 plan outlines how these debts will be repaid. This can involve partial repayment over an extended period, or a significant reduction or complete discharge of the debt, depending on the debtor’s ability to pay. The plan must be confirmed by the bankruptcy court.
Once a Chapter 11 plan is confirmed, the debtor is generally discharged from most pre-petition debts, including credit card debt. For individual debtors, discharge usually occurs after all plan payments are completed. For business debtors, discharge happens upon plan confirmation.
This discharge legally releases the debtor from personal liability for these obligations, effectively resolving the debt. The original credit card accounts are not reinstated; the associated debt is legally resolved, and the accounts remain permanently closed.