Credit Cards and Bankruptcy

Contrary to what most people think, you can keep one or more of your credit cards despite going bankrupt.

Pay off any credit cards you wish to survive the bankruptcy. Use them occasionally, but pay them off on time in full each month. At the time of filing, be sure that they show a zero balance.

When you list your debts on your petition, don’t include these paid off credit cards. With the exception of Sears and Discover, you’ll probably be able to keep some of them. This is because credit card companies usually check new bankruptcy notifications against only those credit cards with outstanding balances. (they want to see if they are going to have to write off any debt) Cards with no outstanding balance sometimes escape notice. Also some Visa and MasterCard banks do not, by policy, cancel paid up cards that are current. Individual bank policies vary widely.

With a chapter 7 bankruptcy, you can probably get away with saving one or more credit cards as the court won’t be interested in zero balance cards. With a chapter 7 bankruptcy your court appointed trustee is only interested in learning about your financial situation for a brief period. What happens in the future is of no interest to them.

But under chapter 13 the process is entirely different. The trustee will be assuming complete control over all your finances for anywhere from two to five years and will be very interested in your future spending habits. They may demand that you provide them with the information on any zero balance cards you may possess.

Or he may insist that all creditors (including zero balance creditors) be notified of the bankruptcy filing. In chapter 7 you’re just passing through, with chapter 13 the you and your trustee are entering into a long process that will difficult for the both of you. If you are to have any chance of success, the trustee must be totally in control of every penny you have.

And then there are the Credit card reporting agencies who may notify your zero balance card banks of your filing without your permission or knowledge.

But be careful about paying off one card to protect it with a larger than normal payment. Remember, any unusually large payment made within three months of a filing is called a “preference”. To the court it appears that you favored one creditor with a disproportionate share of your money which in effect cheated the others out of their fair share. The court trustee can (and probably will) “recover” those funds and arrange a more democratic distribution.

Don’t be tempted to “reaffirm” a credit card debt (which means the debt will survive your bankruptcy), just to save the credit card for future use. You will be able to get new cards soon enough. Unless the outstanding balance is quite small, reaffirming is a bad deal. Don’t listen to the horror stories about how bankruptcy filers have to go through years and years of credit depravation. That’s a myth. Today there’s a whole industry out there eager to do business
with you.

The creditor may offer all sorts of inducements for a signature, but you should know that it’s a sucker deal plain and simple. Don’t buy into it.

Under chapter 13, your unsecured debts, (Which includes most credit cards) will be paid off for less than is owed. Fifty to seventy percent would be a quite normal level. And since you’re not paying the full amount, you can expect most creditors to immediately cancel your account (unless you reaffirm the debt).

It’s not unusual for a credit card bank to claim that your debt non-dischargeable and should be paid in full. They can use several different approaches here. One would be to claim you used fraud in obtaining their card. (hell, they issue cards to people’s cats and dogs so you know they aren’t very careful about who they send cards to!)

Did you inflate your salary a bit? (Most people do) Did you purchase or obtain cash advances for more than $1,150 during the 60 days just before your filing? (many credit card issuers advertise that their cards come in handy “when you’re short of cash”!) Have you increased your credit card purchasing unusually? Even the act of visiting an attorney can be viewed as evidence of fraud!

If your balance is considerable, you can expect your bank cards to come after you in this way. You can also expect a ton of unsubstantiated claims that you should have no problem denying later.

Happily, most courts look on these claims of fraud with disdain. Often the court will disallow their claims - but you shouldn’t bank on that. Be prepared to counter their claims as accurately as you can. In the end, they’re just trying to scare you into signing a reaffirmation agreement so stay calm and in control.

Be careful here because if they challenge you in this way, you’ll have to make a response or they will win by default and your debt will remain even though your bankruptcy goes on as planned.

Changes in your purchase pattern, any over limit purchases, any purchases attempted after being notified the card was cancelled, charge activity after you lost your job, multiple purchases on the same day, unusual charges for luxury items or vacations may cause you problems.

Bank credit cards will review your purchase records carefully in order to determine something they call “initial date of insolvency”. According to them this is the date you became unable to pay your bills and should have stopped making credit card purchases. In their view any purchases made after that date represent a fraud.

Personal Bankruptcy Exempt Items

Exempt items are those that the legal system has determined you’ll need to rebuild your life after bankruptcy. So they’re the ones the court won’t touch - the ones you get to keep while the court-appointed trustee will sell off your non-exempt assets and distribute those funds to your creditors in proportion to the amount owed.

Your goal here is to convert as many non-exempt items as you can into exempt items well before your day in court. Some items are obvious. Sell off a non-exempt item and buy clothing and food. You get the idea. Ask your lawyer before you make any moves on this. We’ll also look at how you can make it more difficult for the trustee to liquidate an asset in the hopes he’ll abandon the item as unprofitable.

You will probably be allowed to keep inexpensive household appliances providing their value is less than $200 per item. Some states have other values for particular items such as refrigerators and ovens. If possible, transfer or sell off any higher priced items more than a year before filing. Any last minute asset changes may be reversed by the court.

Health aids prescribed by your physician will probably be exempted. This could even include a swimming pool for someone with leg or foot problems! The amount of the exclusion is usually very high or even unlimited. A specially equipped car or van would qualify. Even a normal car that you need to get too and from the doctor’s office for prescribed medical treatments has been known to qualify.

When you describe your assets on the petition, resist the temptation to artificially inflate their values. Be as accurate as you possibly can. Also be careful to note any damage that might reduce an item’s value. The lower it’s value, the more likely it is that you will be allowed to keep it. If you must make an error on value, it’s better to state a lower rather than a higher value.

When You File Your Personal Bankruptcy…

The biggest mistake here is the failure to keep your bankruptcy attorney notified as to your current address. The court may have to send you legal documents and will need to get them to you on a timely basis. Many people file for bankruptcy and then promptly move to a new place where the bankruptcy court can’t find them.

Be careful with this, it can hurt you. Keep your attorney notified and follow up with him to be sure he keeps the bankruptcy court properly notified. Failure to promptly sign and return a legal document from the court could cost you plenty.

One legal trick is to have all your legal correspondence sent through your attorney. Of course there will be a small charge, but having your mail handled in this way just might help you hide behind the “lawyer-client privilege” loophole should any problems arise later.

Do not enter into any new credit contracts without clearing them in advance with your attorney. The first order of business when you file is to be sure that any creditors that you suspect may be contemplating seizing any of your assets be immediately officially notified of your filing to halt their activities.

Your bankruptcy attorney should notify your creditors by phone and then follow up by mailing each creditor an official notification which includes your case number. To be sure your car isn’t grabbed by an over-anxious finance company, place several copies of a notification (ask your lawyer for copies) in prominent places in and on the car. Creditors and repossession agents know that they cannot seize a car that bears such a notice and will usually walk away.

If your car is repossessed by a firm that has been legally notified of your filing, inform your attorney at once. He may be able to get it returned. Ask you bankruptcy lawyer if it’s advisable to hide the car until things “cool down”. Laws vary so don’t act without legal advice on this one. If it’s alright, rent one of those storage locker places for a month and store the car there. Or stash it in a friend’s garage but make sure it’s a buddy your creditors don’t know about.

You should know that it’s a common practice for your trustee to abandon assets of low value as unrecoverable. Any item that isn’t worth selling may be left in your hands. Having many assets of low value is preferable to having a few assets of greater value. Trustees tend to zero in on higher value non-exempt items and may ignore some of the other less valuable items.

Most trustees will accept two excuses for a debtor not making the required appearance at the creditors’ meeting. Illness and incarceration are both common excuses. In these cases, questions can be answered over the phone or via a printed questionnaire. (Some sensitive individuals have stress-related health problems as a result of their desperate financial situation.) aaa

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