Saving a Credit Card for a Rainy Day?

From time to time a Chapter 7 client will ask me, "Can I keep a credit card with a zero balance?"

The answer is, "Yes. . .but."

Be honest: As a bankruptcy debtor you are required to name all creditors and the amount owed as of the day your bankruptcy case is filed. These creditors are sent notice of your case directly from the bankruptcy court. The flip side of this is that if you do not have a balance on a credit card, you do not have to list the creditor. Consequently the bankruptcy court does not send the credit card company notice of your bankruptcy case.

Be aware: Many credit card companies conduct periodic checks on their cardholders' credit to discover financial changes, including matching bankruptcy records. Once you are discovered to be in an open bankruptcy case, the card company will terminate your line of credit. The slight benefit here is that if you escape the initial detection, you may be able to use the credit card to jump start your credit recovery after bankruptcy.

Be warned: You must disclose any payments totaling more than $600 made to one creditor within 90 days of the bankruptcy filing date. This is called a "preference" situation, and the bankruptcy trustee can ask the creditor to turnover the money. If you pay off a credit card in order to keep it out of the bankruptcy, you may be swapping one bankruptcy entanglement for another. Best advice: consult with your attorney before making any pre-filing payments to creditors.

Also, while using credit after a bankruptcy filing is not restricted for Chapter 7 debtors, using credit without court permission is prohibited during a Chapter 13 case. Again, consult with your attorney if you need a credit card for work or otherwise.

Now, be smart: Credit after bankruptcy is not all that difficult to obtain. Sure, not many will qualify for $5,000 in credit a month after the bankruptcy discharge, but why do you need all that credit in the first place? Debit cards can be used as credit card substitutes for most transactions, even purchasing hotel rooms. Unsecured or secured, credit or debt, Visa or MasterCard, are all available after your bankruptcy discharge. Speak with your bankruptcy attorney about the pros and cons of keeping a credit card "off the books."