Many people considering bankruptcy want to know if they can keep some of their credit cards after bankruptcy. The reasons vary. Some want to pay off a particular debt, some want to keep a specific card because it offers a particularly low interest rate, but most often the reason is that they simply want to have access to a credit card after bankruptcy. Whether you can keep a credit card after bankruptcy often depends on whether there is a balance on the card when the bankruptcy is filed.
You cannot keep a credit card with a balance when the bankruptcy is filed
If there is a balance on a credit card when the bankruptcy is filed, it must be listed in the bankruptcy. The reason for this is that all debts must be listed in the bankruptcy. Intentional failure to list a debt in the bankruptcy is considered fraud, and may result in very serious consequences, including denial of discharge and even criminal penalties. Furthermore, the purpose of bankruptcy is to eliminate debt, and in almost all cases all credit card debt will be eliminated in bankruptcy, so it is to your benefit to list all credit card debt in bankruptcy.
Practically all banks and credit unions will cancel a credit card that is included in a bankruptcy.
You may be able to keep a credit card that has no balance when the bankruptcy is filed
Whether or not you can keep a credit card that has no balance when the bankruptcy is filed depends on the bank. If a card has no balance, then it will not be listed in the bankruptcy. In addition, if you have no other loans with the particular bank, the bank would not suffer any losses from your filing for bankruptcy. In fact, in such situations, because the bank is not listed in the bankruptcy, it will not get notice from the bankruptcy court that you filed for bankruptcy. All of this may mean that the bank will not be aware of your bankruptcy, and even if it becomes aware, it may choose not to cancel your card because it has not suffered any losses.
However, a bank is not required to allow you to keep your credit card even if the bank has not suffered any losses from your bankruptcy. Some banks have strict financial requirements for credit card eligibility, which may include a certain minimum credit score, or absence of bankruptcy filings. If a bank has such requirements, it may choose to terminate a credit card even if there was no balance when the bankruptcy was filed. Furthermore, even if a bank does not get notice of the bankruptcy, it may conduct periodic credit checks or inquiries through which it can find out about the bankruptcy. In short, whether or not you can keep a credit card with no balance is entirely in the bank’s discretion.
You should not pay off credit cards before filing for bankruptcy
The fact that a bank may allow you to keep a credit card without a balance does not mean that you should pay off a credit card before filing for bankruptcy. In fact, doing so will be counter-productive. In Chapter 7 bankruptcy, the bankruptcy trustee can undo any payments you made within 90 days before bankruptcy that are considered a “preference.” A payment is considered a “preference” if it is made for an old debt, or for a debt that had been due before the payment was made. Generally, a credit card payment will be considered a “preference” unless the charges being paid were incurred within the prior month. So, if you pay off a credit card shortly before filing for bankruptcy, the trustee will get that money from the bank, which means that there will still be a balance owed on the credit card. On top of that, you will have lost the money that you used to pay off the credit card. In short, paying off a credit card before filing bankruptcy is almost always a bad option.
Getting a new credit card after bankruptcy
If you are unable to keep any credit cards you had when the bankruptcy was filed, the best solution is to get a new credit card after bankruptcy. This is actually easier than many people think. It is not uncommon for people to become inundated with credit card offers shortly after filing for bankruptcy. Such credit cards usually come with steep interest rates, but the purpose of using a credit card after bankruptcy should never be to finance purchases long term. Rather, credit card use should be limited to situations where other payment methods are not accepted, and to rebuild credit. To do this effectively, you will want to pay your credit card bill in full every month, making the interest rate on the card irrelevant.
Even for those who are not able to get any regular credit card after bankruptcy, there is an alternative—a secured credit card. This type of card requires a deposit with the bank, which acts as protection for the bank in case the credit card balance is not paid. Using such credit card will also help you to re-establish credit, and to get a regular unsecured credit card later on.