Can You Keep Your Credit Cards When You Declare Bankruptcy?
When you declare bankruptcy you are expected to turn in a list of all your debt – credit cards, medical bills, mortgage, everything. But what happens if you want to hang on to a credit card and use it after you declare bankruptcy? Is it legal?
Technically you can hang onto a credit card or two when you file bankruptcy, but you have to handle it carefully.
The correct way to keep a credit card through bankruptcy:
- 6 to 12 months before you plan to declare bankruptcy, you have to pay the balance off on the card. Zero balance – no money owed.
- You will have to keep the card at zero balance throughout your bankruptcy proceedings. Keep a zero balance on your credit card until your bankruptcy is discharged.
- When you make up the list of everything you owe, do not list the card. Bankruptcy gets rid of your debt, and you will not have any debt on that card.
Now, the main reason for keeping a credit card active is simple. You will not be able to get anything but a secured card (or a card with $250 in up front fees) right after you declare bankruptcy. Being able to keep a card with a decent interest rate through your bankruptcy will help you repair your credit that much faster.
The risks:
- If you pay down that credit card less than 6 months in advance it could cause your other creditors to challenge the legitimacy of your bankruptcy. After all, you had they money to pay down that debt, why couldn’t you pay theirs? That could actually cause your bankruptcy to fall through. If that happens you will be out the money for your lawyer, and still owe on all the debt you were trying to wipe out.
- Even if you don’t list the credit card when you declare bankruptcy, the bank that issued your card could still cancel it when your bankruptcy goes through. If that happens, you have wasted the money you used to pay down the debt you had on that credit card.
If you can’t pay down your credit card balance at least six months prior to your bankruptcy, there is still one way you might be able to keep your credit account.
You can do what is called “re-affirming the debt.” This basically means that you call your credit card company, explain that you are filing bankruptcy, and that you would like to keep your card. It’s sketchy territory.
Your lender will want you to keep the debt and pay them back, but you are going to have to convince them that you really can do it. Otherwise they will close out your account. If that happens you will be stuck with the debt after your bankruptcy, and you still won’t have an open credit account.
Is there a better option?
There might be. Look at it this way: If you owe $12,000 on a card – even if it has an excellent interest rate, you are going to run into a lot of problems trying to keep it open throughout the bankruptcy proceedings. Financially, it makes more sense to include the card in your bankruptcy. Take the $1200 (or $600 or $300) you would have used to pay down that card and put it into a secured card after your bankruptcy is discharged.
Cards like the Orchard Bank Secured Credit Card have very low interest rates, are easy to get, and you even earn a tiny rate of interest on the money in your savings account. This acts as a failsafe too. If something bad happened and you got behind on that card after bankruptcy, then at least you know the savings account will cover your balance in the event of a default.
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