Can You Keep Some Credit Cards If You Declare Bankruptcy?
Being out of work for an extended period of time is one of the leading reasons a person files for bankruptcy. The others may include unpaid medical bills and divorce.
Filing for bankruptcy can make you feel as though your world is crashing around you. Most people use this as a last resort—when the burden of debt becomes far too overwhelming. Bankruptcy basically freezes your credit file, meaning you can't apply for any new credit during the time your case is pending.
If you used your credit cards to stay afloat while you were out of work, it’s almost impossible to get a handle on that debt without some help.
This is the story of a sales rep who was out of work for six months:
I’m a sales rep for a company that sells medical equipment. Two years ago I was out of work for about six months. My wife supported the family with her job, but things were tight. We used a lot of credit to keep us going and maxed out some of our cards. We also borrowed $5,000 from her father.
I finally got a job, and we’ve been making progress on paying down our debts, but it seems like we’re so far in a hole that we’ll never be able to climb out. Maddie and I want to file bankruptcy, put all this behind us and get a fresh start. Before we do, we’re hoping you can answer some questions.
I’m concerned about what will happen if I get laid off again. I’d like to hold onto a couple of my credit cards just in case. Can we do that? If I keep those accounts open, won’t that help us re-establish our credit after the bankruptcy?
We fully intend to pay Maddie’s father back the $5,000 we borrowed. I really don’t want to list him as a creditor.
If I don’t get laid off, I’m worried about my company's credit card. My name is on the card and I understand that I’m personally liable on it. I have a balance on it right now because I haven’t been reimbursed for my last business trip. What happens to it when I file bankruptcy?
Let’s see if we can address Andrew's concerns:
Can I keep a couple of credit cards? In a word, “no.” Bankruptcy isn’t a pick and choose type of proposition. Bankruptcy is based on a principle of fairness. All creditors are to be treated the same. It wouldn’t be fair for you to discharge that $5,000 balance you owe to First National Visa but keep the personal loan you borrow from the credit union at work.
Sometimes people will tell me they didn’t list a creditor because the account had a zero balance. I’ve also had clients ask me if they could hold onto an account to make it easier to re-establish credit after the bankruptcy is over. Unfortunately, the lenders don’t look at this the same way you do. Many creditors subscribe to services that peruse the bankruptcy filings nationwide on a daily basis. They compare the filings to their own customer databases. Any active account—even if it has a zero balance—that matches up to a bankruptcy case will lose its borrowing privileges immediately.
It’s also worth noting, although this may seem obvious, any accounts you fail to list in your bankruptcy paperwork will not be discharged. To be eligible for discharge, the creditor must have been provided notice of the bankruptcy. So, you can’t list just the name on the account without the address or provide incorrect information that would make it difficult for the creditor to identify the account.
Most courts have also held that you can’t discharge those accounts in a future bankruptcy. Therefore, if you run up a balance on those accounts, you’ll be liable for payment until the statute of limitations runs.
Can I protect that loan from my father-in-law? All that I said in the previous section? It applies here, too. In the eyes of the law, the loan from your father-in-law isn’t special. It has the same characteristics as the loan from the credit union and the Visa card. So that principle of fairness we talked about would apply here as well. In fact, when you do business with an insider or someone with whom you have a special relationship, the court looks at those transactions even more carefully because people have a tendency to treat those relationships with favor.
But, you say, I really don’t want my father-in-law to know about our bankruptcy and other personal business. I’m afraid that ship has sailed. You opened yourself up to that when you agreed to the family loan. Under the law, your father-in-law has about as many rights as any other creditor—including the right to information about your financial situation.
To help you feel better about it, though, keep in mind you can pay him back even when the loan is included in the bankruptcy and discharged. A discharge doesn’t magically make the debt disappear. It just relieves you of any liability to pay it. In effect, it gives you the option to pay it later if you choose. But you can’t be forced to pay it by the creditor.
Avoid preferential transfers. I’ll put in a word here about preferential transfers. There’s another way you can cause difficulty with a family loan in a bankruptcy case. Before the bankruptcy, if you make payments on that family loan when you’re having trouble making payments to your other creditors, you’re again not treating all your creditors fairly. The payments on the family loan are called preferential transfers. The bankruptcy trustee, who is appointed by the court to administer your case, has the authority to ask your father-in-law to return those payments. That money will go into a pool from which the trustee will pay creditor claims pro rata — meaning according to their percentage of the whole. Your father-in-law might get a portion of those payments back, but probably not as much as he had to turn over. How is this fair, you ask? It may seem like a harsh result for your father-in-law, but it gives your entire creditor pool a chance to share in the wealth where otherwise they might be shut out.
The moral of this story: treat your family loan the same way you treat Visa or the credit union.
What about that company credit card? So, the company issued you a credit card that you use to pay your travel expenses. You’re concerned about including it in your bankruptcy. You’re right to be concerned, but you’ll only have to list the card if you’re liable to the lender on the balance.
Company credit cards come in three varieties, based on who’s liable on the account — not necessarily who pays the bill:
- The monthly statement goes directly to the employer, and the employer is responsible for paying the bill.
- The monthly statement goes to the employee, who is liable for payment of the account, then seeks reimbursement from the employer.
- A combination of the two. The statement usually goes directly to the employer, but the employee will reimburse the company for any personal expenses he or she incurs.
To disclose or not to disclose? When you file for bankruptcy, you must list that card if you have any personal liability on it. If your company shoulders that entire burden, and you have no responsibility for the account, then you should not list the card.
If you’re not sure whether you’re responsible for payment, your human resources department should be able to clear that up. But this may clue you in: if your employer did nothing more than hand you a card (even one with your name on it) and tell you what you could purchase with it, it’s probably a company-issued card that carries no individual liability. If you had to fill out an application for the card, like you did when you applied for your other personal cards, then you are most likely liable and need to list that debt in your bankruptcy.
What happens to the account in my bankruptcy? So, what happens if you list the card in your bankruptcy? Almost universally, the lender will close the account as soon as it gets wind of your bankruptcy. But the lender will still expect payment from the co-borrower — your employer — if there’s a balance on the account.
Do I have to tell my employer that I’m filing for bankruptcy? If you have to list that company credit card, you need to talk with your employer before you file for bankruptcy. This is not something you want your accounting, HR people or your boss to find out when they get a notice from the lender that the account is closed or if they get a notice from the bankruptcy court.
The thought of having to sit down with an employer and admit that you’re going to declare bankruptcy can be pretty intimidating. Despite what you may be expecting, in my experience, most employers are pretty empathetic. If you work for a large company, you can be assured you’re not the first employee they’ve had to file a bankruptcy case. Be assured, too, that it is illegal to discriminate against a person just for filing a bankruptcy case.
Alternatives if the company credit card Is in bankruptcy: Putting that company credit card account into your bankruptcy case is not ideal for you or your employer, but it’s not the end of the world. It will require that you and your employer come up with a work-around. For example:
- Another corporate card: Many national banks, including American Express, Bank of America, Capital One, Chase, and Citibank offer business credit programs. Your employer probably has established relationships with one or more of these and can access its business credit card program. Most likely, your employer will have to agree to an account that doesn’t require that you take on any liability.
- Company debit card: Your employer may set you up with a debit card. Employers don’t really like this arrangement. They have fewer options to control spending when the money is being debited directly from a deposit account.
- Your personal debit card: The worst-case scenario is the employer who requires you to use your own debit card, but reimburses you later.
- Your personal credit card: I know, you’re thinking, “Wait! Didn’t I have to put all of my accounts into the bankruptcy case?” That’s true, but there’s no reason you can’t at least try to open another credit account after your bankruptcy case is over. In fact, you’ll probably start receiving offers before the toner on your discharge order is dry. Most of those will be a high fee/high-interest cards, or secured credit cards, but they’re a way to get back in the game and get that piece of plastic to have on your next business trip. Try these ideas for establishing credit after bankruptcy.
After the Discharge
Declaring bankruptcy can feel like it's the end of your (financial) world. But you won't have to wait for too long to start re-establishing your credit history. True, the bankruptcy will stay on your file anywhere between seven to ten years, But once everything becomes final, you'll be able to start applying for credit. And despite what you may think, there are creditors who want to work with people in these situations to help them rebuild their financial profiles.
There is a very good chance you will have to apply for a secured credit card. That's a card that requires a deposit—usually tucked away in a savings account of some kind—that's equal to your credit limit. Once you've shown a good history of charges and payments, the credit card company will release the hold on your security and you can then use the card freely.
Make sure you look for cards that aren't loaded with fees. But be prepared to pay a higher interest rate and carry a low credit limit.
While this may seem like an arduous process, keep in mind, it won't last forever. There is a light at the end of the tunnel.
The Bottom Line
Filing for bankruptcy may seem very overwhelming, but it's not a permanent situation. When you file, you must include each and every creditor to whom you owe money—even if that's a friend or family member. And don't think about keeping one of your credit cards tucked away, even if you simply want to rebuild your credit history. Once the card company finds out you're in the process of bankruptcy, it will shut down your account. The best thing to do is ride out the wave and wait until your bankruptcy is resolved before re-establishing your credit.