Can You Keep Your Credit Cards If You File Bankruptcy?

Bankruptcy provides financial relief for individuals with overwhelming debt. It involves filing a petition with a federal court, which can lead to either the discharge of certain debts or the restructuring of payments over time. Understanding how credit cards are affected during this process is important for anyone considering bankruptcy. The treatment of credit cards varies significantly depending on the type of bankruptcy filed.

Credit Cards in Chapter 7 Bankruptcy

When an individual files for Chapter 7 bankruptcy, credit card debt is treated as unsecured debt and is discharged. This means the individual is no longer legally obligated to repay these balances. Upon notice of a bankruptcy filing, credit card issuers generally close the accounts, even those with a zero balance. The accounts are closed because bankruptcy filings are public records, and card issuers often monitor credit reports, canceling accounts when a bankruptcy is reported.

Secured credit cards, which are backed by a cash deposit, are often closed during Chapter 7 bankruptcy. Reaffirming a secured credit card debt, promising to continue payments, is rare and generally not advisable. The goal of Chapter 7 is to eliminate debt, and reaffirming a credit card debt goes against this principle.

Credit Cards in Chapter 13 Bankruptcy

Chapter 13 bankruptcy differs from Chapter 7, as it involves a court-approved repayment plan for debts, typically lasting three to five years. Credit card debt, as an unsecured debt, is included in this repayment plan. While the debt is being repaid through the plan, credit card accounts are frozen or closed by the issuers. This prevents new charges and ensures all creditors are treated equitably under the bankruptcy proceedings.

Obtaining new credit, including credit cards, during a Chapter 13 repayment plan requires permission from the bankruptcy court. It is uncommon for individuals to retain pre-existing credit cards with outstanding balances during Chapter 13, as the primary goal is debt repayment and not incurring new obligations.

Obtaining Credit Cards After Bankruptcy

After a bankruptcy discharge, individuals can begin rebuilding their credit and may obtain new credit cards. Once the bankruptcy case is discharged, which can take approximately four to six months for Chapter 7 or three to five years for Chapter 13, applying for new credit becomes possible. Secured credit cards are a common and effective tool for this purpose. These cards require a cash deposit, which serves as the credit limit, and help establish a new positive payment history.

Using a secured credit card responsibly, by making on-time payments and keeping balances low, can help improve a credit score. Many credit card issuers offer secured cards designed for individuals with damaged credit. Over time, as a positive payment history is established, individuals may qualify for traditional unsecured credit cards, though these initial offers may come with higher interest rates and lower credit limits. The key is consistent, responsible use to demonstrate creditworthiness.