Can You Keep Credit Cards in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy offers individuals with consistent income a structured path to manage overwhelming debt. This process, often called a wage earner’s plan, involves a court-approved repayment plan over a period typically ranging from three to five years. It allows debtors to reorganize finances and repay their debts, in part or in full, under court supervision, aiming for financial stability and a fresh start without liquidating assets.

Understanding Credit Cards in Chapter 13

When an individual files for Chapter 13 bankruptcy, the immediate impact on existing credit cards is significant. Credit card debt is unsecured, meaning it is not backed by collateral like a house or car. All existing credit card accounts, regardless of balance, must be listed in the bankruptcy filing.

Upon filing, an automatic stay immediately halts most collection activities by creditors. This prevents credit card companies from making collection calls, sending demand letters, or initiating lawsuits. Credit card companies typically close or freeze existing accounts shortly after receiving notice, rendering physical cards unusable, even with a zero balance, as bankruptcy is often considered a ground for account cancellation by lenders.

How Existing Credit Card Debts are Handled

Existing credit card debts are managed within the Chapter 13 repayment plan. Credit card balances are general unsecured debts, lower in priority than secured debts like mortgages, or priority unsecured debts such as certain taxes or child support. The amount paid to unsecured creditors depends on the debtor’s disposable income and the “best interest of creditors” test.

Disposable income is the amount remaining after deducting necessary living expenses and mandatory payments to secured and priority creditors. All disposable income must be committed to the repayment plan. The “best interest of creditors” test ensures unsecured creditors receive at least as much through the Chapter 13 plan as they would in a Chapter 7 bankruptcy, which involves asset liquidation. Unsecured credit card debts are often paid only a fraction of their original balance, or nothing, with any remaining balance discharged upon successful completion of the three-to-five-year plan.

Seeking New Credit While in Chapter 13

Obtaining new credit, including new credit cards, while under an active Chapter 13 repayment plan typically requires formal court permission. This requirement ensures that any new debt does not jeopardize the debtor’s ability to complete their approved repayment plan and protects the interests of existing creditors. Debtors must file a “motion to incur debt” with the bankruptcy court, detailing the proposed loan, its necessity, and how it will be afforded without disrupting the payment schedule.

While new unsecured credit cards are generally difficult to obtain without court approval, exceptions exist for small amounts. Some jurisdictions might allow small debts, often under $1,000 or $2,500, without direct court approval. Secured credit cards are a more accessible option for rebuilding credit, as they require a cash deposit as collateral, mitigating lender risk. These cards help establish a positive payment history, contributing to credit rebuilding efforts over time.