Can You Keep Some Credit Cards When Filing Bankruptcy?

Bankruptcy serves as a legal framework designed to help individuals navigate overwhelming debt and embark on a path toward financial stability. It provides a structured process for addressing various financial obligations, offering a potential fresh start. A common concern for individuals considering this process involves understanding the fate of their credit cards and whether any can be retained. This process significantly impacts credit relationships, often leading to changes in how financial accounts are managed.

Credit Card Treatment in Bankruptcy

When an individual files for bankruptcy, most unsecured credit card debt is subject to discharge. Discharge refers to the legal elimination of the debt, meaning the card issuer can no longer pursue collection efforts against the debtor. This principle applies whether the filing is under Chapter 7, which involves liquidation of certain assets, or Chapter 13, which entails a structured repayment plan.

Credit card issuers generally close unsecured credit card accounts once they are notified of a bankruptcy filing. This closure occurs because the cardholder’s financial risk profile has changed, and the debt associated with the card is being discharged. Even if an account has a zero balance, issuers typically close it due to the bankruptcy.

Bankruptcy filings are public records, and credit card companies routinely monitor credit reports for such information. Upon discovering a filing, issuers often cancel accounts, regardless of the outstanding balance. An immediate effect of filing for bankruptcy is the implementation of an “automatic stay,” which legally prevents creditors, including credit card companies, from initiating or continuing collection activities. This stay provides immediate relief from collection calls and lawsuits.

The primary objective of bankruptcy for unsecured credit card debt is its discharge, which relieves the debtor of personal liability. For Chapter 7 cases, this discharge can occur relatively quickly, typically within a few months after filing. In Chapter 13, the discharge of credit card debt happens after the successful completion of a court-approved repayment plan, which usually spans three to five years.

Specific Credit Card Situations

While most unsecured credit cards are closed and their debts discharged in bankruptcy, certain situations present nuances. Secured credit cards, for instance, are treated differently because they are backed by a cash deposit provided by the cardholder. This deposit acts as collateral, making the card a secured debt rather than unsecured.

If a cardholder wishes to keep a secured credit card, they may be able to do so by continuing to make payments and potentially entering into a reaffirmation agreement, much like with a car loan or mortgage. However, if the cardholder chooses not to maintain the account, the debt can be discharged, and the issuer will likely keep the security deposit up to the amount of the debt owed. Secured credit cards can also be a tool for rebuilding credit after bankruptcy.

Credit cards with a zero balance are generally not exempt from closure. Even if there is no debt owed, credit card companies are highly likely to close these accounts upon learning of a bankruptcy filing. It is a federal requirement to list all credit accounts in a bankruptcy petition, including those with zero balances.

For individuals who are merely authorized users on someone else’s credit card account, their bankruptcy filing will not directly impact the primary cardholder’s account. The primary cardholder remains responsible for the debt. However, the authorized user’s access to the card will likely be revoked by the issuer or the primary cardholder.

Reaffirmation agreements are formal contracts where a debtor agrees to repay a debt that would otherwise be discharged in bankruptcy. While these agreements are sometimes used for secured debts like car loans or mortgages to retain the collateral, they are generally not advised or approved for unsecured credit card debt. The purpose of bankruptcy is to provide a fresh financial start, and reaffirming credit card debt would undermine this objective.

Credit Card Use During Bankruptcy

It is important to cease all use of credit cards intended for discharge as soon as bankruptcy is contemplated or filed. Continued use of these cards immediately before filing can complicate the bankruptcy process and potentially lead to certain debts being deemed non-dischargeable. This action is viewed as incurring debt with no intent to repay, which can be considered fraudulent.

Specific rules exist regarding spending shortly before a bankruptcy filing, known as the “presumption of non-dischargeability.” For instance, cash advances totaling more than $1,000 obtained within 70 days before filing are presumed to be non-dischargeable. Similarly, purchases of luxury goods or services exceeding $725 (as of 2024, subject to periodic adjustment) made within 90 days before filing are also subject to this presumption. Luxury goods are defined as items not reasonably necessary for the debtor’s support or that of their dependents.

If significant payments are made to certain creditors shortly before filing, typically within 90 days, the bankruptcy trustee may have the authority to “unwind” these payments. This means the trustee can recover the money from the creditor to ensure a fair distribution among all creditors.

Any new credit card debt incurred after the bankruptcy petition has been filed will not be discharged in that particular bankruptcy case. These “post-petition” debts remain the debtor’s responsibility. After filing for bankruptcy and receiving a discharge, it is advisable to dispose of physical credit cards by cutting them up. This helps prevent accidental use and signifies the formal end of the credit relationship.