Are your frequent flier miles protected in bankruptcy?

A creditor might go after the asset, no matter what the airline says

Question for the expert

Dear Cashing In,
Wanted to follow up to an earlier column about points being potentially taken away in a bankruptcy. What are your thoughts on the likelihood of them being either frozen or taken away when, let's say, you have 300,000 points and owe $60,000 on several Visa cards that are tied to United Mileage Plus? Thanks! -- Joe 

Answer for the expert

Dear Joe,
I assume you are thinking of declaring bankruptcy and wondering if your 300,000 miles are protected. The column that you refer to pointed out that you don't have to declare frequent flier miles as items of value in bankruptcy proceedings, citing the fact that as a member of the Mileage Plus program, the terms and conditions state that "accrued mileage and certificates do not constitute property of the member." That wording is still in the terms and conditions today. Because mileage awards don't constitute property, the column stated, they would likely not be put at risk in the case of a general bankruptcy.

The article also mentioned that if you had enough miles, an issuer might challenge the ownership and include it in a motion to the court. Are you wondering if 300,000 is the magic number that would cause Chase -- the bank that issues the United Mileage Plus card -- or any other creditor of yours to take legal action?

I asked Ted Connolly, a bankruptcy attorney in Boston and author of "Road Out of Debt." It's true your miles may be protected as exempt property and not considered property of the debtor, he says, based on how the certificate reads. However, he advises listing those miles if you file for bankruptcy. "Even though the airline may not consider the airline miles as property of the holder, bankruptcy law requires that a debtor include all 'legal and equitable interests' on his or her schedules when filing for bankruptcy," Connolly says.

"Because the definition is so expansive, it likely means that the airline miles are personal property and must be included on his Schedule B," he explains. (Schedule B is the federal bankruptcy form on which the filer lists all personal property.) "It would therefore be an asset that would be available to creditors, unless the debtor can exempt them under state or federal exemptions. As a nonexempt asset, a Chapter 7 trustee could decide to auction it off and make the proceeds available for creditors. In a Chapter 13 bankruptcy, the miles would remain the debtor's if the debtor can confirm a plan that the bankruptcy court approves -- paying his or her debts over three to five years and paying creditors a percentage of their debts."

Regardless of whether you file for Chapter 13 or Chapter 7 bankruptcy, Connolly says, "failure to include the asset on the bankruptcy schedules would not be a good idea, as failure to include all assets could cause a bankruptcy judge to deny a debtor's discharge or even (though unlikely) cause the debtor to be investigated by the US Trustee's Office, a division of Department of Justice, for bankruptcy fraud. The bigger the reward mileage, the bigger chance that the credit card company may take an interest in whether the asset is disclosed when a debtor is attempting to discharge its credit card debt, I would imagine."

Just to put this into perspective, it's important to remember that while your 300,000 miles can buy a lot of free travel, it's nowhere near the equivalent of your $60,000 credit card debt. If you managed to get the cheapest award seats available, those points would buy 12 domestic fares of 25,000 points each. If those flights average $400 each, your points would equate to $4,800 worth of travel, about 8 percent of your debt.

A protected asset potentially worth 8 percent of your debt probably makes the idea of bankruptcy a little more palatable. If the miles aren't ruled to be personal property, they could keep you from being completely grounded during your financial recovery -- but don't count on that and don't try to hide them.

Still, bankruptcy isn't necessarily a must. If you're still trying to pay off that $60,000 without declaring bankruptcy and are wondering if your miles are protected, it will depend less on the amount you owe and more on whether you're paying the required minimum on all those cards every month. Penalties such as freezing or taking away reward points typically kick in only if you fall behind on payments.

Your 300,000 reward points were accumulated through the United Mileage Plus program, which is handled separately from the credit card. To some degree, your frequent flier mileage is protected by the airline. Unlike other types of rewards, your miles are governed by the airline (United), not by the bank that issued your card. Banks tend to be tougher about penalties for late payments than their partner airlines.

Most Chase Visa cards will dock rewards if you miss two payments and you can't pay to reinstate them, but the rewards for Chase Visa cards associated with frequent flier programs are managed by the airlines. Every month after an account cycles, Chase sends accumulated points directly to the partner airline -- in your case, United. A customer who has an open account and charging privileges at the time of the statement date will earn those points. Points may be forfeited if an account is closed during a current cycle. Rules for collecting or forfeiting points are based on the airline's rules.

These vary from airline to airline, but airlines have a stronger motivation to protect your mileage and, thus, your loyalty.

See related: 14 key factors when considering bankruptcy, 8 things you must know about credit card debt

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Updated: 12-12-2018