Introduction
Many people who file for bankruptcy question if they are allowed to maintain one or more credit cards as backup for emergencies. In general, since you file for bankruptcy, you might not because your credit cards would be terminated regardless. Most often, credit cards of bankruptcy filers are cancelled once they file for bankruptcy. Credit card providers have a tendency to penalise their cardholders for filing any form of bankruptcy. However, there are some exemptions for which rules must be met in order for the bankruptcy filers to keep their credit cards.
There are some exceptions that only apply to people who petition for chapter 7 bankruptcy. Some credit card providers will let you keep your card but with a smaller credit limit in exchange for you paying back some of your bills. A proposed reaffirmation agreement, which is a commitment between you and your creditor that you would pay all or part of the debt despite filing for bankruptcy in exchange for a small amount of new credit, may even be sent to you or your lawyer automatically by some businesses.
A chapter 7 bankruptcy filer may be permitted to keep their credit cards by certain of their card issuers, but the interest rate will be changed to a higher than usual interest rate. This is in addition to the credit limit being reduced. However, if you can consistently make on-time, complete payments on your credit balance each month, you will never be charged a financing fee and the high interest rate won't harm you.
All credit cards, with the exception of those used to file for chapter 7 bankruptcy, must be cancelled at the time of filing. However, some credit card owners who have kept their balances at zero for an extended length of time choose not to report their credit cards when filing. Because repayment ordination is a trustee function, this action could be viewed as illegal because it amounts to giving one creditor (your credit card issuer) priority over other creditors.
The best course of action is to report all of your credit cards and cancel them if you are not qualified to file under Chapter 7 or if you are filing under Chapter 7 but were unable to obtain the approval of your credit card issuers to keep them. Most of the time, you must wait until the bankruptcy filing is over before working with a debt management specialist to gradually rebuild your credit. Of course, you could not be qualified for premium or even mid-tier credit cards in the months and years following the bankruptcy filing.
However, with some work and sound financial planning, such as paying off your credit card debt in full and on time each month, you may start to rebuild your positive credit history, start to get rid of the bankruptcy stigma, and finally return to having a decent to excellent credit score.
Conclusion
Credit cards must often be cancelled by bankruptcy filers. There are, however, some exceptions that apply to chapter 7 bankruptcy files. Under certain conditions, chapter 7 bankruptcy filers may be permitted to maintain their credit cards.
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