Bankrate.com

Credit cards in bankruptcy

Dear Dr. Don,
If you go bankrupt, do you lose all your credit cards?
Diana Debt-Free

Dear Diana,
Not necessarily. It depends on your payment history on that account, your outstanding balance, whether the credit card company is willing to work with you to keep the account open and your ability to make payments on the credit line. Count on starting over with no credit cards. Then finding out that you can hold on to one or two will be good news.

In a Chapter 7 bankruptcy filing, you list all of your debts with the bankruptcy court along with a list of your assets. The court constructs a bankruptcy estate from your nonexempt assets. You keep the exempt assets. The proceeds from the sale of items in the bankruptcy estate are used to pay down your outstanding debts. All eligible debts are discharged in the bankruptcy process. You no longer owe these debts.

Credit card companies may try to get you to reaffirm a debt or transfer the debt to a new subprime credit card account. The point in filing for bankruptcy is to have these debts discharged, so reaffirming a debt to keep a credit card isn’t really in your best interest.

Nor is it in your interest to do a balance transfer to a subprime account, in effect taking a dischargeable debt and putting it outside of the control of the bankruptcy court, and at an outrageous interest rate to boot.

Secured debts on your home or your car are a different matter. The lender’s lien on the title isn’t discharged in bankruptcy proceedings. Working with your secured creditors to be able to hold on to your home or your car is important.

According to Nolo.com, “In Chapter 7 bankruptcy, whether or not you will lose your house depends on the amount of equity you have in the property and the amount of any homestead exemption (which varies state-to-state) to which you are entitled.”

Hire a bankruptcy attorney to guide you through this process. Worry more about rebuilding your credit than holding on to your credit cards. Once the bankruptcy has been discharged, it’s time to think about a secured credit card as a first step toward rebuilding your credit. This Bankrate feature is a good overview on selecting a secured credit card.