Bankruptcy is often the last resort of those struggling with significant financial obligations. In some cases, people delay bankruptcy filings despite struggling with their finances and worrying constantly about making ends meet.
When people rely on revolving lines of credit, like credit cards, bankruptcy can be an intimidating concept. Filers naturally worry about losing the financial flexibility that comes from having credit cards available. While bankruptcy does require some short-term financial sacrifices and compromises, the process can put someone in a better position to manage their finances successfully after their discharge.
What usually happens to credit cards during a bankruptcy?
Lenders close accounts automatically
The courts communicate with the credit bureaus about bankruptcy filings daily. Many financial businesses subscribe to services that provide them with same-day notifications when a borrower or debtor files for bankruptcy. Credit card companies tend to automatically close lines of credit when a cardholder initiates bankruptcy proceedings.
Doing so prevents fraudulent charges made without the intent of repaying the debt. Even accounts without a balance that may be subject to discharge typically face immediate closure after a bankruptcy filing. The individual requesting bankruptcy relief may benefit from planning in advance to cover predictable expenses through alternate means until after they complete the bankruptcy process.
Credit becomes available again quickly
Many people think they have to wait until the record of their bankruptcy comes off of their credit reports to secure credit cards and other financial instruments after a personal bankruptcy. Thankfully, that is not the case.
Credit cards are often among the first opportunities extended to those who have recently filed for personal bankruptcy. The rules about filing for bankruptcy more than once limit the exposure for such lenders. Lenders also typically offer credit cards that require security deposits and charge annual fees in addition to interest.
While such lines of credit may cost more to use and maintain, they can be invaluable during the process of rebuilding a credit report and improving a credit score after bankruptcy. Those who pursue a Chapter 7 bankruptcy may go only a few months between the closure of their credit cards and the acquisition of new accounts. As they establish a history of paying their balance in full and on time, they may become eligible for new and better lines of credit.
Preparing to live without credit cards can benefit those intending to file. Someone who files for bankruptcy before creditors garnish their wages or place liens against their assets can potentially regain control of their finances and take control of their debts more effectively than they otherwise might.
