Do All Of My Credit Cards Need To Be Included In My Bankruptcy?

1/29/2018

When filing for bankruptcy, you generally must disclose all debts you owe, including credit card balances, even if you would prefer to keep certain cards outside the bankruptcy. Filing can also affect whether credit card accounts remain open, regardless of their balance. Because bankruptcy has significant legal and financial consequences, it is important to understand your obligations and options before filing. A nonprofit credit counselor can help you review your overall financial situation, while a qualified bankruptcy attorney can provide legal guidance specific to your circumstances.

3 Key Takeaways

1. Bankruptcy requires a complete picture of your debts. You generally cannot simply leave a credit card with an outstanding balance out of your bankruptcy because you want to continue using it. The original article specifically addresses this requirement for Chapter 7 filings.

2. Keeping a credit card may not be within your control. Bankruptcy can affect your existing credit accounts, and creditors may close an account or otherwise change its terms. The article also discusses reaffirmation, but this is an area where legal advice is particularly important.

3. Explore your options before filing. A nonprofit credit counselor can help you assess your budget, debts, and possible alternatives to bankruptcy. If bankruptcy appears to be the appropriate option, a qualified bankruptcy attorney can explain the legal consequences and requirements based on your individual situation.

If you're considering bankruptcy but have one or two credit cards you would like to keep, you may wonder whether you can simply leave those accounts out of your bankruptcy filing.

Perhaps you use a particular card for business expenses, travel or emergencies. Maybe the balance is small and you've always paid the account on time. Whatever the reason, it is understandable to want to preserve access to some credit.

However, bankruptcy requires a complete and accurate picture of your financial situation. If you owe money on a credit card when you file, you generally cannot simply choose to exclude that debt from your bankruptcy paperwork because you would like to keep the account open.

Here's what you should know.

Do You Have to List All of Your Credit Card Debts?

Generally, yes. When filing bankruptcy, you are required to disclose your debts and creditors as part of the bankruptcy process. Credit cards are generally unsecured debts and must be appropriately disclosed along with your other debts.

Bankruptcy is not designed to allow you to select which creditors are included based on which accounts you would prefer to keep.

Failing to disclose a debt or creditor can create complications in your bankruptcy case. If you're unsure whether a particular debt needs to be listed, discuss it with your bankruptcy attorney rather than deciding to leave it off yourself.

What If the Credit Card Has a Zero Balance?

A credit card with no outstanding balance is different because there may be no debt owed to that credit card company at the time you file.

However, that does not necessarily mean the account will remain open.

Credit card issuers routinely review customer accounts and may close an account or reduce a credit limit based on changes in a cardholder's financial circumstances or credit profile. A bankruptcy filing can therefore affect credit cards even when no balance is owed.

Don't assume that keeping a card at a zero balance guarantees you'll be able to continue using it after filing.

Can I Pay Off a Credit Card Before Filing Bankruptcy So I Can Keep It?

This is an area where you should be particularly careful.

It might seem logical to pay off a small credit card balance before filing bankruptcy so that you can keep the account. But payments made shortly before a bankruptcy filing can receive additional scrutiny.

Bankruptcy law contains rules governing payments and transfers made before filing, including certain payments that favor one creditor over others.

That doesn't mean you should stop paying bills simply because you're considering bankruptcy. It does mean you should avoid making unusual financial moves specifically in preparation for bankruptcy without first discussing them with a qualified bankruptcy attorney.

If you are considering paying off a particular creditor, transferring money, giving away property or making other significant financial changes before filing, get legal advice first.

Can You Keep Using a Credit Card After Filing Bankruptcy?

You should not assume that an existing credit card will remain available after you file.

Even if an account has no balance, the issuer may decide to close it. If a balance exists and the debt is included in your bankruptcy, continued use of the account generally should not be expected.

Bankruptcy can also affect your ability to obtain new credit for some time afterward.

The good news is that bankruptcy does not mean you will never have access to credit again. Over time, responsible financial habits can help you begin rebuilding your credit history.

What About Business Credit Cards?

Business-related credit cards can be more complicated than they initially appear.

If you use a personal credit card for business expenses and you are personally responsible for the debt, the fact that the purchases were made for business purposes does not necessarily remove your personal obligation.

Similarly, some business credit cards require a personal guarantee. That could make you personally responsible for the balance even though the card carries a business name.

The type of business you operate, who is legally responsible for the account and how the credit agreement is structured can all matter.

If you own a business or use personal credit to fund business expenses, make sure your bankruptcy attorney knows about every account before you file.

What Is Reaffirmation?

You may hear the term "reaffirmation agreement" when researching Chapter 7 bankruptcy.

A reaffirmation agreement is an agreement in which a borrower voluntarily agrees to remain legally responsible for a particular debt rather than having that personal liability discharged in bankruptcy.

Reaffirmation is most commonly discussed in connection with secured debts, such as certain vehicle loans, rather than as a strategy for keeping ordinary credit cards.

Reaffirming a debt can have serious consequences because you remain responsible for paying it after bankruptcy. It should not be entered into simply because you would like to preserve access to credit.

If reaffirmation is relevant to your situation, discuss the risks and alternatives with your bankruptcy attorney.

What Happens to Credit Card Debt in Chapter 7 Bankruptcy?

Credit card balances are generally considered unsecured debts.

Many unsecured debts may be discharged in Chapter 7 bankruptcy, meaning the borrower is no longer personally liable for paying them after receiving a discharge.

However, not every debt is dischargeable, and the circumstances surrounding a debt can matter. For example, unusual credit card activity shortly before filing may receive scrutiny.

This is another reason to be open with your bankruptcy attorney about your recent credit card use and financial activity.

What Happens to Credit Card Debt in Chapter 13 Bankruptcy?

Chapter 13 generally involves a court-approved repayment plan lasting several years rather than the relatively quicker liquidation process associated with Chapter 7.

Credit card debts and other unsecured debts are addressed through the Chapter 13 plan according to bankruptcy rules and the circumstances of the case.

Borrowers may repay some or all of their unsecured debt through the plan. Eligible remaining balances may potentially be discharged after the borrower successfully completes the plan.

Because Chapter 13 treatment depends on your income, assets, debts and repayment plan, an attorney can help explain how your credit card balances would be handled in your particular case.

Do You Have to Complete Credit Counseling Before Filing Bankruptcy?

In most cases, yes. Individuals filing bankruptcy are generally required to complete credit counseling from an approved agency before filing, subject to limited exceptions.

Pre-bankruptcy credit counseling gives you an opportunity to review your financial situation, budget and potential alternatives before moving forward with bankruptcy.

It is important to understand that this required counseling is different from the debtor education course generally required after filing and before receiving a bankruptcy discharge.

Credit counseling can help you better understand your financial options, but a credit counselor does not make the decision about whether you should file bankruptcy. That decision is yours, ideally after discussing the legal implications with a qualified bankruptcy attorney.

Before Filing, Look at Your Complete Financial Picture

If credit card debt has become difficult to manage, bankruptcy may be one option, but it isn't the only possibility for every borrower.

Before making a decision, take a complete look at your finances:

• How much unsecured debt do you owe?

• Are you current or behind on your payments?

• What caused the debt to accumulate?

• Is the financial hardship temporary or ongoing?

• Can your budget realistically support your current payments?

• Do you have secured debts, such as a mortgage or auto loan?

• Are there co-signers or joint account holders who could be affected?

• Are there alternatives to bankruptcy that you haven't yet explored?

A nonprofit credit counseling session can help you organize this information and better understand potential debt-management options.

If you're seriously considering bankruptcy, consult a qualified bankruptcy attorney who can explain how the law applies to your specific circumstances.

Don't Leave a Debt Out Simply Because You Want to Keep the Card

If you owe money on a credit card when you file bankruptcy, don't assume you can exclude the account because the balance is small, the card is useful or you want to continue using it.

Bankruptcy requires accurate disclosure of your financial obligations.

Instead of focusing on which cards you can preserve, focus on the larger goal: addressing the financial situation that led you to consider bankruptcy and creating a realistic plan for moving forward.

Bankruptcy can offer a financial fresh start for some consumers, but rebuilding afterward depends on the habits and decisions that follow. Creating a sustainable budget, building emergency savings and gradually reestablishing credit can all be part of that process.

Understanding your options before you file can help you make a more informed decision about your financial future.

 

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