Credit card during bankruptcy? Risky business
Can I keep one credit card for emergency use without listing in
my creditors for bankruptcy?
This is a question I have been asked by literally hundreds of clients.
If you were sitting in front of me in my office I would lean a little
closer and say in my "very serious" tone of voice: "Charles, it
is crucially important that you are honest about all of your debts.
If you are not, it will be possible for an unlisted creditor, that
is, your emergency credit card, to claim that you are engaging in
fraud, file a challenge with the trustee and possibly nullify your
bankruptcy. And you don't want that."
Now, while there is one way you can keep a credit card (which I'll describe at the bottom of this article), most people who try to keep a card or two in reserve know they're doing something wrong. I'm pretty sure that you're not contemplating fraud, Charles, you're just asking a question. However, I want you to know that this is a very big deal.
There are those who attempt to hide credit card accounts,
other debts and even valuable assets. One such person was Kelli
L. Worth of Cedar Rapids, Iowa.
Ms. Worth filed bankruptcy and discharged $70,000
in debt, but she concealed that she had a sport utility vehicle
and money allocated for Botox injections (among other things). Just
to show how smart she was, she went onto a local TV show under an
anonymous name and told the world that the new bankruptcy laws were
a joke and she got away with keeping everything she wanted. Federal
investigators watched the tape and matched Worth's story to her
case. In September 2006, Worth
was sentenced to four months in jail and four more months on
There are two lessons here. The first is that some people actually do get away with fraud. The second is that some people do not. Just so all of my readers understand my position, I believe that bankruptcy laws are a means to get a second chance and are a privilege of living in the United States; I have no sympathy for people who get burned trying to take advantage of a system that's already there to help them.
However, just to be thorough, let's run through the options of what can happen if you are carrying a balance with a credit card and you leave this card off of your petition so that you have it in case of emergency.
||Consequences of 'forgetting' a loan in
The only way you can actually keep a credit card is
this: It must have been without a balance for a long time. In other
words, you don't have to list a credit card if there's no balance.
If you recently paid off the balance and then didn't list it, that's
fraudulent behavior. It's known as a "preference," as in, you preferred
to pay off one creditor as opposed to the others. Preferring is
illegal and the trustee can require those assets be brought back
into the bankruptcy proceeding in order to be used for all creditors.
To reiterate, if you have a card that doesn't have a balance and hasn't for some time, you don't need to list it on your petition. Now, suppose the issuer of the card checks your credit because they are thinking of making you an offer for additional credit and they discover that you've filed bankruptcy. Even though you're not carrying a balance, they may think that you're more of a risk and they may close the account. They may not.
The best way to keep a card for emergencies is to get a card, use it for a while, then stop using it. Then, if and when you ever do file bankruptcy, your card with zero balance is less likely to be canceled because you'll have a history of paying your balances. Oh, and whatever you do, don't go on TV to brag about it.
Justin Harelik is a practicing attorney in Los
Angeles. To ask a question of the Bankruptcy Adviser, go to the
"Ask the Experts"
page and select "bankruptcy" as the topic.