Credit Cards and Bankruptcy

Contrary to public opinion, you can keep one or more of your credit cards despite going through bankruptcy. Pay off any credit cards you wish to survive the bankruptcy. Use them occasionally, but pay them off on time in full each month. At the time of filing, be sure that they show a zero balance.

When you list your debts on your petition, don’t include these paid off credit cards. With the exception of Sears and Discover, you’ll probably be able to keep some of them. This is because credit card companies usually check new bankruptcy notifications against only those credit cards with outstanding balances. (they want to see if they are going to have to write off any debt) Cards with no outstanding balance sometimes escape notice. Also some Visa and MasterCard banks do not, by policy, cancel paid up cards that are current. Individual bank policies vary widely.

With a chapter 7 bankruptcy, you can probably get away with saving one or more credit cards as the court won’t be interested in zero balance cards. With a chapter 7 bankruptcy your court appointed trustee is only interested in learning about your financial situation for a brief period. What happens in the future is of no interest to them.

But under chapter 13 the process is entirely different. The trustee will be assuming complete control over all your finances for anywhere from two to five years and will be very interested in your future spending habits. They may demand that you provide them with the information on any zero balance cards you may possess.

Or he may insist that all creditors (including zero balance creditors) be notified of the bankruptcy filing. In chapter 7 you’re just passing through, with chapter 13 the you and your trustee are entering into a long process that will difficult for the both of you. If you are to have any chance of success, the trustee must be totally in control of every penny you have.

And then there are the Credit card reporting agencies who may notify your zero balance card banks of your filing without your permission or knowledge.

But be careful about paying off one card to protect it with a larger than normal payment. Remember, any unusually large payment made within three months of a filing is called a “preference”. To the court it appears that you favored one creditor with a disproportionate share of your money which in effect cheated the others out of their fair share. The court trustee can (and probably will) “recover” those funds and arrange a more democratic distribution.

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