Discharge of Credit Card Debt in Chapter 7 Bankruptcy

When it comes to filing for Chapter 7 bankruptcy, many people have concerns regarding their credit cards. For the average person, credit cards are a necessary part of everyday life. They allow you to make purchases before payday and allow you to make payments later.  They also provide you with fraud protection. It’s no wonder that people want to know how their credit cards will be affected before filing for bankruptcy. In this guide, we’ll go through everything you need to know in regards to a Chapter 7 bankruptcy and your credit cards. 

Should I Stop Using My Card Before Filing Bankruptcy?

It is a good idea to stop using your credit cards before filing for bankruptcy. This is because spending on credit cards in this time period may be misconstrued as fraud. Bankruptcy trustees and creditors carefully review your financial activity in the months leading up to your filing. If it appears that you were buying nonessential items in this time period, they may claim that you were doing so knowing that you would declare bankruptcy and the debt from these items would be discharged. This would be considered fraud, and if the court agrees that this is the case, the debt from these purchases may not be discharged through your Chapter 7 bankruptcy.

However, if you need your credit card to make necessary purchases, such as for food or shelter, that type of spending is usually viewed by the court as ok prior to filing. Just be sure to only use your credit card for essentials.  For example, gas for the car or groceries for the family is usually not a basis for a fraud claim.  In this example, the purchases were necessary and you have a very good argument that you were not engaging in fraudulent activity. 

When to Stop Using Credit Cards Before Filing Chapter 7

You should stop using your credit cards 90 days before filing for bankruptcy. These 3 months will be the most heavily scrutinized for fraud by the bankruptcy trustee and your creditors. At the very least, any luxury purchases made in this timeframe will not be discharged through bankruptcy. Worst case scenario, your bankruptcy petition will be completely denied or you will be charged with fraud. It is vital that any purchase during these 90 days are only for necessities.  Cash advances on a credit card within 90 days are not recommended.  

Can You Keep a Credit Card in Chapter 7?

Unfortunately, you will not be able to keep a credit card in Chapter 7 bankruptcy. Chapter 7 and credit card debt go hand in hand, with Chapter 7 usually discharging all credit card debt. Unfortunately, this means that the credit card company will almost always terminate your account with them, even if you have a zero balance on the card.   When you acquire a credit card, you agree to pay back whatever you spend on it with interest. Bankruptcy means you have failed to do this, and the credit card company will no longer want to do business with you.  

Can You Get a Credit Card After Filing Chapter 7

It is usually easy to get a credit card after Chapter 7 bankruptcy. In most cases, this is actually a good idea to help rebuild your credit score, assuming you make every payment on time in the future.  In fact, it is best to obtain two credit cards tradelines.  Unfortunately, after filing for Chapter 7, any offers you get for traditional, unsecured credit cards are likely to have unfavorable terms for you. This will take the form of low credit limits and high interest rates. But you will not pay interest at all as long as you pay off the balance every month.  An alternative is a secured credit card. These are cards that require a cash security deposit, which typically becomes your credit limit. This protects the creditor in the event that you don’t make payments, as they can just keep the deposit. 

After a period of one to two years, you will be able to receive much better terms on credit cards with much higher limits and better interest rate terms.  However, it is still best not to carry balances.

The Benefits of Credit Cards After Chapter 7

The main benefit of credit cards after Chapter 7 is rebuilding your credit. To do this safely, there are a few things you should be sure to do. These are:

• Make Payments on Time: It is vital that you pay your credit card bill on time. as payment history is the most important factor in your credit score.
• Keep Your Balances Low: Paying your balance in full or more than the minimum payment can help improve your credit utilization ratio, which affects your credit score. 
• Stick with Two Cards or Less: Having two cards and not ten cards makes it easier to keep track of your purchases and payments.   
• Monitor Your Credit: Keep track of your credit score to ensure that it is improving and you are not making any mistakes.

Credit cards are a vital credit rebuilding tool after Chapter 7 bankruptcy. Just remember to use them responsibly and not to overspend or miss payments.