Be cautious with new credit when considering bankruptcy
By Kevin Weeks
Dear Credit Wise,
Hello. I am just about to file for bankruptcy. I was wondering if it would be wise to apply for a credit card that keeps sending applications in the mail just about weekly stating that I would likely be approved. Should I just keep ignoring it and wait until my bankruptcy is finished? -- Diane
Bankruptcy exists in this country for many good reasons. I'm not sure what the circumstances are that surround your decision to file for bankruptcy, but applying for a new credit card now if you are certain that you will be filing for bankruptcy in the near future has many implications.
It's difficult to say for sure whether you would be approved. Preapproved offers of credit always come with the fine-print caveat that final approval is subject to the lender's credit requirements. Even if you get offers on an almost-weekly basis, you might not be approved. This is especially true if you have outstanding credit card debt that is close to or over the limit, or is past due.
It's also important to ask yourself why you are considering a credit card at all at this point. If you are teetering on bankruptcy, your financial picture is not great. After your filing you will be forced to live within your means and using any credit card that will add debt to you after that point will be a big mistake. I'll assume for this discussion that you will pay off your credit card balance every month in full as you move forward. If you fail to pay off the credit card balance every month, the amount you pay in interest will quickly negate any advantages of maintaining a card. There is no doubt that a credit card is needed for online purchases, travel reservations, car rentals, etc. But you must only use any card for these types of actions and pay in full each month.
Also keep in mind that any purchases on a credit card made just before a bankruptcy filing is a criminal offense if you attempt to include that debt in the filing. So, if you do in fact obtain this card or if you use any cards you currently have and add to their balances you cannot include those amounts in any bankruptcy filing.
Applying for a card after you file will be problematic because filing for bankruptcy negatively affects your credit score for 10 years. This is not to say that you would not be approved after you file, but you will find that the terms you are offered, especially your interest rate, are undesirable.
Since you were not clear on where you are in the filing process, you should know that there is a pre-bankruptcy credit counseling requirement. The counselor will look at your income, expenses and debts and give you your options at the end of your session. This counseling will help you understand the implications of filing for bankruptcy before you actually move forward.
Even with a bankruptcy, though, options exist in the form of Chapter 7 and Chapter 13. Chapter 7 is the one that basically erases your debt; with Chapter 13 you will be put on a payment plan to repay at least a portion of your debt. The results of your counseling session will have a direct bearing on which chapter you will qualify for if you decide to move forward with the bankruptcy.
For me, the larger question here is not whether you should apply for a new credit card now or after you file, but whether you should apply at all. Filing for bankruptcy is a huge step for any consumer to take and as I said will affect your credit for many years. You need to ask yourself what has brought you to this point. The potential of jumping right back into credit card debt is not a good idea, no matter what happens with your bankruptcy. If you do get a new card, pay off your bill in full every month. This will save you on interest charges and more importantly, keep you from accumulating debt that could be a problem for you in the future.
Be wise with your credit!
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Published: July 25, 2015
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