There are many things people think about in the days and weeks before a Bankruptcy case is filed, and one of them is what happens to their credit cards. Most of us use credit cards on a weekly, if not daily, basis for lunch, groceries and online bill payments. If we suddenly realize we cannot use those cards anymore, and have to start using cash and old-fashioned checks, we might get a little stressed about it. Many people who travel for business almost have to have a credit card for travel arrangements. A common question is whether a credit card can be paid off in full just before a Bankruptcy case is filed so the card issuer allows the continued use of the card after Bankruptcy. It makes some sense on one level, but does it work?
The bad news is that credit cards are almost always cancelled after a Bankruptcy filing, whether or not there is a balance on the account. In a Chapter 13 case, when you are in a repayment plan for 3-5 years, you are generally prohibited from incurring any debt at all. The Chapter 13 Trustee will insist that you cancel any cards that remain open. If you continue to use them, your case might be dismissed. In a Chapter 7 case, there is no legal prohibition against keeping or using credit cards after the case is filed. However, again, almost all banks and card issuers will automatically cancel the cards when they get notice of the filing. Even if there is no balance and they are not listed as a creditor in the Schedules, they will generally find out within 2-3 months through credit monitoring.
What if you filed a Chapter 7 case and really, really need to keep a card for legitimate reasons (such as business travel and expenses) and you pay it off monthly? The first and best option is a debit card that has the same protections as a credit card. Next, look for a secured credit card if you can afford the cash deposit. If you have a relationship with a bank or credit union, go to them in person to discuss. Do not just start applying for cards on the internet because you might find yourself paying extremely high fees in addition to interest (and, remember, you want to avoid interest and carrying balances). If this does not work, you will probably have to wait until your discharge and try again. You may even get quite a few offers in the mail but, again, do not just start applying for cards without carefully researching the offers and making sure you know all fees. One of the worst things you can do after a successful Chapter 7 is run up debts and incur unnecessary fees and charges. If you can, live on a cash basis for a few months and get a debit card. One final warning — in or out of Bankruptcy, never, ever give a creditor or anyone else your bank account numbers for automatic withdrawals. We can come up with possible exceptions to that rule, but the best course of action is to just not do it at all. Use a debit card number, again with the same protections as credit cards. Even in those circumstances where using bank account drafts is necessary, set up a separate account and only deposit money for those drafts.