Can You Keep a Credit Card in Chapter 7?
Understand how Chapter 7 bankruptcy impacts your credit cards, from their status during the process to rebuilding credit afterward.
Chapter 7 bankruptcy offers individuals a legal pathway to a financial fresh start. This process, often called liquidation bankruptcy, aims to discharge most forms of unsecured debt. Unsecured debts are those not backed by collateral, like credit card balances, medical bills, and personal loans. Through Chapter 7, debtors can eliminate the legal obligation to repay these qualifying debts, addressing financial burdens and beginning to rebuild stability.
Existing Credit Cards in Chapter 7
When an individual files for Chapter 7 bankruptcy, existing credit card accounts are significantly impacted. Credit card debts are unsecured and discharged through the bankruptcy process, legally removing the cardholder’s responsibility to repay. Upon notification of the bankruptcy filing, credit card issuers almost invariably close associated accounts, even those with a zero balance, as the filing triggers account cancellation.
Secured credit cards are treated differently. These cards require a cash deposit as collateral for the credit limit. While the unsecured debt on a secured card can be discharged, the issuer may allow the account to remain open if the cardholder is current on payments and reaffirms the debt. Reaffirming involves signing a new agreement to continue payments, opting out of discharge for that debt. If not reaffirmed, the account closes, and the issuer uses the security deposit to cover any outstanding balance.
Credit Card Use During Chapter 7
Using credit cards shortly before filing for Chapter 7 bankruptcy carries risks. Large purchases or cash advances can be viewed as fraudulent if there was no intent to repay.
Presumptive Fraud Rules
Bankruptcy law includes “presumptive fraud” rules. For instance, luxury goods or services over $800 from one creditor incurred within 90 days before filing may be presumed fraudulent. Cash advances over $1,100 from one creditor obtained within 70 days of filing can also trigger this presumption. If deemed fraudulent, these debts may not be discharged, and the debtor remains responsible for them.
Once a Chapter 7 petition is filed, debtors must immediately stop using all credit cards. Charges made after the filing date are post-petition debts and are not subject to discharge. Continuing to use credit cards post-filing can lead to legal repercussions, including accusations of fraud or contempt of court. The automatic stay prevents creditors from collection actions but does not permit new debt with the expectation of discharge.
Accessing Credit Cards After Chapter 7
After a Chapter 7 discharge, obtaining traditional, unsecured credit cards can be challenging due to the bankruptcy’s negative impact on credit scores. The bankruptcy remains on a credit report for up to 10 years, signaling higher risk to lenders. Despite this, it is advisable to begin rebuilding credit soon after discharge. Many individuals receive new credit offers within months of their bankruptcy case closing.
Secured credit cards are an effective tool for credit rebuilding post-bankruptcy. These cards require a cash deposit, which sets the credit limit, providing a safety net for the issuer. Responsible use, including on-time payments and low balances, is reported to credit bureaus and helps improve credit scores. Some secured cards may convert to unsecured cards after diligent payment history. Other options include subprime credit cards, designed for individuals with poor credit, but these often have higher fees and interest rates.