Even paid-off cards usually canceled in bankruptcy
To Her Credit
Dear To Her Credit,
I am in credit card debt. My husband keeps saying I should file for bankruptcy. I do want out of debt. If I pay off my American Express card, if I would file for bankruptcy on the other cards, can I keep my American Express card since it is paid off? -- Nancy
When you file for bankruptcy, you must list all your creditors to whom you owe a balance. These creditors receive a notice of your bankruptcy and will likely cancel your account. In some cases, they will let you keep the account if you sign a reaffirmation agreement, but it's up to them.
According to R. Glen Ayers, Texas attorney and ex-bankruptcy judge, there's no case law that requires you to list a zero-balance account on your bankruptcy filing.
That doesn't mean you'll get to keep the card. Ayers says, "It's an automatic cancellation now. American Express started it and now everyone does it. Your credit card will be canceled."
You can still choose to pay off a card or other debt before you file, but be careful paying off more than $600 on any account shortly before bankruptcy. One of the purposes of bankruptcy is to see that the various creditors are treated equitably. Paying off one account before filing for bankruptcy essentially puts that account at the head of the line. The bankruptcy court may see paying off one account as a preference payment and possibly disallow your bankruptcy relief.
You should also avoid using your credit cards as much as possible before you file for bankruptcy. The courts take a dim view of "luxury" purchases made within 90 days of filing.
A bigger question than whether you can keep one card is whether you should file for bankruptcy at all. If you got into debt because of some extraordinary one-time event, such as a medical crisis, business failure or extended unemployment, and you have more debt than you can reasonably expect to pay off, bankruptcy can be your best shot at starting over financially.
However, many people get into debt simply because they have more expenses than income. Every month, they make up for the difference by going a little further into debt. As the interest and fees kick in, they slide into debt faster and faster, until they can't see any way out besides bankruptcy.
The problem with bankruptcy in such a situation is that it doesn't permanently solve anything. Credit card debt is a symptom, not the underlying problem. If your expenses are greater than your income, you'll still need to make up the difference. To improve your financial outlook for the long term, you may need to find a better job or improve your skills so you qualify for one. You may choose to cut back on spending, sell a car or even move someplace with a lower cost of living.
Before you file for bankruptcy, I recommend you seek help from a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America. They can help you see all your options, including paying off your debts, filing for bankruptcy (the bankruptcy under which you pay off some or all your debts under a court-approved plan) or a Chapter 7 bankruptcy.
If you do file for bankruptcy, you shouldn't have a problem getting new credit cards afterward. Some lenders actually see you as a better risk after bankruptcy. After all, you have no lingering credit card debts anymore and you can't file for Chapter 7 bankruptcy again for the next eight years. The cards you qualify for may have higher interest rates, but that's a good motivation to avoid carrying a balance on them.
Try to resolve your credit card debt without filing for bankruptcy. If that's not possible, seek qualified legal advice and follow it carefully. As soon as the bankruptcy is final, start building your credit history by paying bills before they are due and keeping balances down. It's never too late to take care of your credit and work toward your financial goals.
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Published: October 2, 2015
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