October 19, 2017

Retaining Credit Cards through Bankruptcy

I have many clients who want to hold onto a credit card through bankruptcy. But this is not always the best idea and is a lot more difficult than it may seem at first blush.

In the first place, you must list all creditors you owe money to in your bankruptcy, including any medical bills and credit card debt. Omitting any creditor from your bankruptcy is perjury. But what happens when you want to keep a credit card open when you file bankruptcy? If you have a credit card open, in which you owe a zero balance ($0.00) on, this credit card is not actually a creditor and does not need to be listed in your bankruptcy.

However, just because a credit card has a zero balance ($0.00) and need not be listed in your bankruptcy as a creditor, the credit card may still be closed as a result of the bankruptcy filing. Most, if not all, credit card companies pay for a service to screen bankruptcies by social security number. Most credit card companies’ policies are to close the account once the bankruptcy is discovered, whether you owe $10,000 or $0.00.

While some people may think that if they pay the credit card down to zero ($0.00) prior to bankruptcy, they will not need to list the credit card as a debt for bankruptcy, and the card will remain open. The card in most cases will be closed. Additionally, this may create a recoverable “preference payment.” A recoverable preference payment essentially means you paid a creditor $600 or more in the 90 days before you filed the bankruptcy. In such cases, a bankruptcy trustee, or the individual who administers the bankruptcy, can recover this payment for the potential benefit of all your creditors. In this example, not only could your card with a zero balance on the day of bankruptcy filing be canceled, but a bankruptcy trustee could go after the credit card company for a recovery of funds.

But what about reaffirming the debt in bankruptcy? Certain debt can be reaffirmed through the bankrutpcy process, which essentially means you re-obligate yourself to the debt. Reaffirmation of debt makes better sense in the case where you get to hold onto the collateral, such as reaffirming a car loan and holding onto the car. I always advise clients never to reaffirm an unsecured debt, as there really is no benefit here.

After you file bankruptcy, opportunities for credit abound. An emergency credit card can be easily replaced after the bankruptcy is completed in most cases.

If you are interested in learning more about bankruptcy and its effect on credit, please feel free to contact me today for a free bankruptcy consultation.

Thank you.

Tom Butcher
Bankruptcy Lawyer
116 Highway 99 N #101
Eugene, OR 97402
541 762 1967
tom@butcherlawoffice.com

Credit After Bankruptcy

Bankruptcy is not the end-all of credit many people believe it to be.  When used wisely, credit is an important part of our economy and financial lives.  This article details aspects of credit and building credit after filing a bankruptcy.

It goes without saying that filing bankruptcy negatively impacts one’s credit.  For example, a chapter 7 bankruptcy filing stays on a person’s credit report for 10 years while a chapter 13 bankruptcy stays on a person’s credit report for 7 years.  I never quite understood this difference in reporting other than people, somehow, are being rewarded for filing a chapter 13 bankruptcy over a chapter 7.  I do not have empirical evidence to support how much of a person’s credit score may be negatively impacted by the filing of a bankruptcy, but often times a person’s score dips below a 550.  FICO, or the main organization that mathematically determines a person’s credit score, indicates that the effect of a bankruptcy on a person’s credit score is determined by the person’s complete credit profile; therefore, depending on many factors, a credit score may be affected differently from one person to another when filing for bankruptcy relief.

But you can rebuild credit fairly fast after you file bankruptcy.  For example, I have written on the subject of reaffirmation agreements and secured debt, such as a car loan.  By reaffirming a car loan through bankruptcy, this will help rebuild credit after bankruptcy.  Reaffirmed debt (usually secured debt) will be treated as normal debt on your credit report, as opposed to debt discharged in a bankruptcy.  And continued timely payments on a reaffirmed debt will help bolster your credit score.

Clients are often surprised that when they file bankruptcy they receive many offers for credit cards and car loans; usually at very high interest rates, though.  The lenders mine the bankruptcy database to send newly-filed bankruptcy debtors credit card and car loan offers for two main reasons: 1) the debtor’s debt-to-income ratio has vastly improved (as the old debt was discharged in bankruptcy); and, 2) people can only file chapter 7 bankruptcy every 8 years and therefore the lenders feel more secure in lending.

I alluded to the debt-to-income ratio above.   By filing bankruptcy, you will get rid of most, if not all, of your debts.  As a result, your debt-to-income ratio (or how much debt you have compared to how much you earn) vastly increases.  This will make you more credit-attractive to lenders.

Now, what is the best way to rebuild credit after you file bankruptcy?  The number one thing is to pay current bills on time.  Second, you can open a secured credit card at a bank, where you secure the credit card with your own funds.  For example, you have $500 in an account, and you are issued a secured credit card for $500.  This secured credit card will be reported to the credit bureaus; so all payments made on time will have a positive impact on your credit score.  This type of credit card, however, will have an interest rate attached and often an annual fee.  The idea will be to use this card and pay it off every month; this strategy will help boost a person’s credit score.

There is also ample opportunity for unsecured credit cards as discussed above.

The bottom line, however, is this: if you use credit wisely and pay your bills on time, you can rebuild credit fairly fast after bankruptcy.

If you have questions about bankruptcy and how it may impact future credit, please feel free to call me today for a free in-office bankruptcy consultation to discuss this matter further.

Pursuant to 11 U.S. Code § 528: "I am a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code."

CAUTION: This website is to provide visitors with basic information about my law office, and information about how to contact me. Every situation is different, and no information on this website is legal advice on any specific question. You should not act on any of the information without first conferring with an attorney licensed in your jurisdiction. No attorney-client relationship or privilege is formed by visiting this site or by unsolicited email. Therefore, initial emails should not contain any confidential information. I may already represent parties adverse to you and cannot advise or represent you until we check for conflicts. I am licensed only in Oregon and offer my services only to those doing business in Oregon, unless I am associated with local counsel in accordance with other states' laws. The applicable laws may have changed after the information on this website was published. While effort is made to keep the information current, you should not presume that all information is up to date. You must confer with an attorney to be sure you have current information.

ContactUs.com