What Happens to My Credit Cards If I File Bankruptcy?

What Happens to Your Existing Credit Cards

When an individual files for bankruptcy, the immediate impact on existing credit cards is significant. Upon notification of a bankruptcy filing, credit card issuers typically freeze or close accounts. Accounts are frozen regardless of balance, becoming part of the bankruptcy estate.

Continued use of credit cards after the bankruptcy petition has been filed can be considered fraudulent, leading to severe legal consequences. It is crucial to cease all credit card use immediately upon filing.

A legal protection known as the automatic stay goes into effect once a bankruptcy petition is filed. This stay immediately halts most collection attempts by creditors, including credit card companies. Creditors are prohibited from calling, sending letters, or initiating lawsuits to collect on debts.

The automatic stay provides a temporary reprieve from collection efforts, allowing the debtor to proceed with the bankruptcy process without harassment. The specific treatment of the credit card debt will depend on the chapter of bankruptcy filed.

Credit Card Debt in Chapter 7

Credit card debt is generally categorized as unsecured debt, meaning it is not tied to any specific asset. In a Chapter 7 bankruptcy, this type of debt is typically discharged. A discharge means the debtor is no longer legally obligated to repay the debt, providing a fresh financial start.

The process involves the bankruptcy trustee examining the debtor’s assets and liabilities. If the debtor qualifies for Chapter 7, often determined by passing the “means test,” the unsecured debts, including credit card balances, are usually eliminated. Once a debt is discharged, creditors are permanently barred from attempting to collect it.

However, not all credit card debt may be dischargeable in a Chapter 7 bankruptcy. For instance, debts incurred for luxury goods or services within 90 days before filing may not be discharged. Similarly, cash advances taken within 70 days before filing can also be non-dischargeable.

Furthermore, any credit card debt incurred through fraudulent activity, such as making purchases with no intent to repay, will not be discharged. The court has the authority to determine if specific debts fall under these exceptions. Debtors are required to disclose all financial information accurately during the bankruptcy proceedings.

Credit Card Debt in Chapter 13

In contrast to Chapter 7, a Chapter 13 bankruptcy involves a court-approved repayment plan rather than a complete discharge of all unsecured debts. Credit card debt is included in this plan, where the debtor proposes to repay a portion or all of their unsecured debt over three to five years. The specific amount repaid depends on the debtor’s disposable income, total debt, and debt types.

The repayment plan prioritizes certain debts, such as child support, alimony, and recent taxes, over non-priority unsecured debts like credit card balances. The amount paid to credit card creditors is determined by how much disposable income remains after accounting for priority debts and necessary living expenses. In some plans, unsecured creditors may receive only a small percentage or even zero payment.

Upon successful completion of the repayment plan, any remaining unsecured credit card debt that was not paid through the plan is discharged. This means that even if creditors only received a fraction of what was owed, the debtor is no longer legally responsible for the rest. Chapter 13 can be a suitable option for individuals who do not qualify for Chapter 7 due to higher income or wish to protect specific assets.

The Chapter 13 plan provides a structured approach to managing debt under court supervision, offering a path to financial stability. Payments are made to a bankruptcy trustee, who then distributes the funds to creditors according to the approved plan. This structured repayment can help debtors regain control of their finances over time.

After Bankruptcy: Rebuilding Credit

While bankruptcy remains on a credit report for several years—typically seven years for Chapter 13 and ten years for Chapter 7—it is possible to begin rebuilding credit immediately. The period following bankruptcy is an opportunity to establish new, positive credit habits. The goal is to demonstrate financial responsibility to future lenders.

One common strategy for rebuilding credit is obtaining a secured credit card. These cards require a cash deposit, which often acts as the credit limit, mitigating risk for the issuer. Timely payments on a secured card help establish a positive payment history, which is a significant factor in credit scoring.

Another approach can involve becoming an authorized user on another individual’s well-managed credit account. This can allow the individual’s credit report to reflect the primary user’s positive payment history, though it offers no direct control over the account. Alternatively, taking out a small installment loan, such as a credit-builder loan, and making consistent, on-time payments can also contribute to credit score improvement.

Monitoring credit reports regularly is also an important step to ensure accuracy and track progress. Reviewing reports from the three major credit bureaus—Equifax, Experian, and TransUnion—helps identify any errors and provides insight into credit score changes. The long-term objective is to gradually improve credit scores and eventually qualify for traditional unsecured credit again.