Does Debt Relief Close Credit Cards?

Debt relief refers to various strategies aimed at reducing or eliminating an individual’s outstanding financial obligations. These approaches are designed to make debt more manageable or to resolve it entirely, particularly when facing significant financial challenges. Many individuals considering these options often wonder about the fate of their existing credit card accounts. Understanding how different debt relief methods interact with open credit lines is important for anyone seeking a path toward financial stability.

Understanding Debt Relief Approaches

Several primary debt relief methods can address credit card debt. Debt settlement involves negotiating with creditors to pay a lump sum that is less than the full amount owed, often through a third-party company.

Debt management plans (DMPs) are structured repayment programs typically offered by non-profit credit counseling agencies. Under a DMP, the agency works with creditors to lower interest rates and consolidate multiple unsecured debts, like credit cards, into a single monthly payment. The goal is to repay the full principal over a set period, usually three to five years.

Bankruptcy offers a legal pathway to discharge or reorganize debts under federal law. Chapter 7 bankruptcy involves the liquidation of non-exempt assets to pay creditors, with remaining eligible unsecured debts typically discharged. Chapter 13 bankruptcy, a reorganization plan, allows individuals with regular income to repay a portion of their debts over three to five years, while retaining their assets.

How Debt Settlement Affects Credit Cards

Debt settlement typically results in the closure of credit card accounts. When a cardholder enters a debt settlement program, they usually stop making payments to creditors and instead deposit funds into a special savings account managed by the settlement company.

Creditors, observing missed payments, will often deem the account delinquent and eventually “charge off” the debt. A charge-off occurs when a creditor writes off the debt as uncollectible, typically after 180 days of non-payment.

Once the debt is charged off, the settlement company negotiates with the creditor or collection agency to accept a lower amount than the original balance. Upon agreement and payment of the settled amount, the credit card account is closed.

How Debt Management Plans Affect Credit Cards

Debt management plans (DMPs) generally require the closure or freezing of credit card accounts included in the plan. These plans are often facilitated by non-profit credit counseling agencies that negotiate with creditors on behalf of the consumer.

A primary condition for creditors to agree to reduced interest rates and consolidated payments through a DMP is that the credit card accounts are no longer used. This ensures that the consumer focuses solely on repaying the outstanding balances without incurring new debt.

While the credit counseling agency cannot directly close the accounts, creditors will typically close accounts once they are enrolled in a DMP. Some programs may allow one credit card to remain open for emergencies, but this is an exception and requires strict adherence to usage guidelines.

How Bankruptcy Affects Credit Cards

Bankruptcy proceedings almost always lead to the closure of credit card accounts involved in the process. In Chapter 7 bankruptcy, credit card debts are considered unsecured and are typically discharged, meaning the legal obligation to repay them is eliminated.

Upon filing for Chapter 7, an automatic stay is immediately put in place, halting collection efforts, and credit card accounts are closed as part of the liquidation process.

For Chapter 13 bankruptcy, credit card debts are included in a court-approved repayment plan that spans three to five years. While the debt is being repaid through the plan, credit card accounts are generally canceled by the issuers. Any remaining unsecured credit card debt is typically discharged upon successful completion of the repayment plan.