Keep Credit Card?

A question frequently asked by many of my clients is, “can I keep a credit card?  As any bankruptcy attorney will tell you, the answer to this question depends on whether you owe a balance on the account associated with the card.  This is because you only have to include your "creditors" and a  piece of plastic in your pocket does not mean that you have a creditor.  To have a creditor means that you owe a balance tied to the piece of plastic that you carry around in your pocket.  Also, if your balance on a particular card is close to zero, then you may want to pay off the balance so that you no longer have a creditor that would need to be listed.  Otherwise, your bankruptcy lawyer will most likely advise you to let the card go.

Can I Keep My Credit Card in My Bankruptcy in San Diego?

The bankruptcy laws require you to list all of your existing debts, including all of your outstanding credit card debt.  You do this in Schedule F of your bankruptcy schedules, which is the bankruptcy schedule where you are required to disclose and list all of your nonpriority unsecured claims (debts), including all unsecured debt.  If your card has a zero balance, then you don't owe any debt.  It's just a card, a piece of plastic, with an account balance of zero dollars.  You only have "debt" if you have a balance that you owe.  If you have a small balance and want to pay off the balance before filing bankruptcy, then you won't have to include the card in bankruptcy.  But before paying off an account balance, talk to a lawyer about the issues that may arise from doing so.

Cards With a Balance

If you owe money (have a balance) on any card, then you must list it on Schedule F.  You don’t get to choose which outstanding debts or account balances, you want to list in your bankruptcy.  In fact, when you sign your petition and schedules you sign a declaration under penalty of perjury stating that you have accurately disclosed all of your debts.  Also, when during your meeting of creditors the bankruptcy trustee will ask you affirm that you have accurately listed all of your debts.

Zero Balance

If you have a card that has a zero balance, either because it has a zero balance now or because you pay off the balance before you file bankruptcy, then you don’t have to list it.  You can keep your credit card and not list the account in your bankruptcy because, technically, you don’t owe that creditor any money.  Since you don't owe any money, there is no debt to list or disclose.

Reasons Not to Pay Off

I usually caution my clients against paying off a balance before they file bankruptcy for the sole purpose of being able to keep a credit card after bankruptcy, for three reasons. 

 

First, even if your balance is zero at the time that you file, your lender may periodically run your credit and see that you filed bankruptcy and then may close your account.  You will then have spent your money to pay off a card that you can no longer use.  You would be wasting your money.

 

Second, if you pay a payment to a creditor outside the ordinary course of business (within the meaning of the bankruptcy laws), the trustee overseeing your case could theoretically recover the payment as a preference payment and distribute the funds among all of your creditors in proportion to the relative amounts of their claims.  If that were to happen, then the credit card you paid off would no longer be paid off and you would still owe money on that card.  Again, you would be wasting your money.

 

Third, once your case is completed and you receive a discharge, you will likely get bombarded with new credit card offers.  If the fees associated with the new cards are less than what it would cost you to pay off the balance on an existing card, then it may make more sense, financially, to include your credit card in your bankruptcy and just get a new card after you receive a discharge.

Cost-Benefit Analysis 

So if you’re considering paying off a particular card just so that you don’t have to include that card in your filing, you may want to think twice.  In most cases, I advise my clients against doing that.  This is not to say that it is a bad idea in every case.  Determining whether or not you should pay off a credit card before you file bankruptcy requires a consideration of the totality of your circumstances, including a cost-benefit analysis, and such a determination can only be made after a careful consideration of your unique situation.

This entry was posted in Credit Card Debt.


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