credit cards

Can I Keep a Credit Card in Bankruptcy?

A common question asked by my bankruptcy clients before filing is, "can I not include one of my credit cards in my bankruptcy and keep it?" The reasons differ. Most people want to keep a card in case of an emergency, or at least for convenience. Some want to keep it for travel. Sometimes, the reason is pure nostalgia. "I've had it since I was a teenager!"

Unfortunately, regardless of the reason, the answer is always "no." Credit cards may never be retained in a consumer bankruptcy. The reason is that creditors of the same class must always be treated the same. If you pay back one credit card, you must pay them all back. If you keep one, you must keep them all. Otherwise, the credit cards not being repaid through your bankruptcy will object to your filing, basically asking, "hey, if they are getting paid, why aren't we?"

Closing out all of your credit cards isn't a big deal in Chapter 7 bankruptcy. You will be able to apply for credit cards several months after filing when your case is discharged. Whether or not you want to may be another issue. Many of my clients profess they never want to use another credit card, and while I encourage them to eventually get one to rebuild their credit, I can understand the sentiment. But, in any case, you will be able to access new credit before very long.

The issue is a bit trickier in a Chapter 13 bankruptcy. These bankruptcies last 3 to 5 years, and you are not permitted to use credit cards during this time. All of your credit cards will be closed. This makes planning and savings important in a Chapter 13 bankruptcy. You will need to maintain savings in case of emergency, as you will not be able to access quick credit. Debit cards will need to be used primarily for convenience (most people don't want to carry around large amounts of cash or trying to pay with checks). The advantages of Chapter 13 bankruptcy far outweigh this inconvenience, but it is something worth planning for and considering.

Not having a credit card for awhile can be an inconvenience in a modern economy, but given the advantages offered by filing bankruptcy, it should be seen as a temporary disruption for the greater good.

Contact us if you are facing large credit card debts. While you can't keep them, it is more important to remember that you can make them go away!

Credit Card Debt and Married Couples

Marital credit card debt is a frequent cause of strife in marriages and a major cause of bankruptcy filings. Marital credit card debt may include debts solely incurred during the time of the marriage. It may also include some debts from before the marriage. Either way, it can burden married couples to the point of destroying the relationship.

Fortunately, most marital credit card debts can be discharged in bankruptcy, including  both joint and individual credit cards. Therefore, a joint card opened before (or after) the marriage is dischargeable in bankruptcy. At the same time, an individual card opened by one of the spouses, opened years before the marriage, is also dischargeable in bankruptcy. Any and all such combinations will be dischargeable, IF the couple files jointly.

This raises a scenario that sometimes occurs... what if one spouse does not want to file bankruptcy? What will happen to the marital credit card debts? In these cases, it will be important to know who is legally obligated on the debt. If only one spouse files, debts solely in his or her name will be discharged in the bankruptcy. Simple enough. This is often sufficient in cases where one spouse entered the marriage with significant credit card debt of their own. But, what about the joint debts?

Joint debtors are "joint and severally" liable. This means their creditors can go after one or both debtors for part (or all) of the debt. This may seem unfair in situations where one joint debtor has numerous attachable assets, while the other has nothing. In any case, this is the law. The creditor can go after whoever it wants, which will almost always be the person with something to take.

So, if one spouse files a bankruptcy on a joint credit card, his or her liability on the debt is wiped out. However, due to joint and several liability, the creditor can go after the non-filing spouse for the full amount. Due to this reality, it is almost always advisable for married couples with significant joint debt to file jointly. It reduces cost (the filing fee is the same for joint bankruptcy filers) and saves time. Not filing a joint bankruptcy will do no good for the household if the creditor can still collect on and possibly sue the non-filing spouse.

In many situations, the debt is in various forms, both joint and individual between the spouses. Contact us for a free bankruptcy consultation to determine if filing bankruptcy jointly, or individually, is the best option for your family. There may be situations where the individual debt of one spouse greatly exceeds any joint debts. I will be happy to walk you through the situation and give you the best options available. 

Can I Keep a Credit Card in Bankruptcy?

Clients will often ask if they can keep one or two credit cards in bankruptcy. Usually, bankruptcy clients will want to keep at least one credit card to cover emergencies or to help bridge the gap between pay periods. Sometimes, the client will have a long-standing account they don't want to close, or a favorite retail card used frequently.

Whatever the circumstances, unfortunately you will not be able to keep and maintain a credit card through bankruptcy. This is true in both Chapter 7 and Chapter 13 bankruptcies, and it doesn't matter whether or not the credit card has a large balance or no balance at all.

Why is the Bankruptcy Code so adamant about all credit card debts being disclosed and eliminated? Wouldn't a credit card company want the account to remain open rather than be discharged? The Bankruptcy Code has other ideas, and it revolves around the theory that creditors of the same type should all receive the same treatment.

This logic prevents creditors from rushing to file lawsuits and make the first or earliest claim on the debtor. It also promotes fairness in general. The debtor is not permitted to pick and choose which credit card will get paid. The credit card companies know this, and accept the treatment. This reduces adversarial motive throughout the bankruptcy process.

In practice, all credit cards are eliminated in a Chapter 7 bankruptcy (with some rare exceptions, such as credit cards used to pay taxes). In a Chapter 13 repayment plan, all credit cards are paid at the same rate, which can range anywhere from zero cents on the dollar, to full repayment.

Debtors filing a Chapter 13 bankruptcy will need to acclimate themselves to not using credit cards for the duration of the 3 to 5 year plan. This may be difficult, but it is certainly not impossible. But, more to the point, it is necessary. All credit cards will be closed out.

Once the bankruptcy is discharged, the debtor will have the opportunity to apply for new credit. Getting new credit cards may be easier than you think. It is highly recommended to get one credit card coming out of bankruptcy, paying the full balance every month. This will rebuild your credit without leading to old debt problems. 

Credit Card Lawsuits, Part IV: What Happens if I Don't Respond

I have already discussed what constitutes a "response" to a credit card lawsuit, in general how to file one, and whether you should respond.

Even if you don't formally respond to the complaint, you should NOT ignore it. Negotiating a debt settlement or filing a bankruptcy will probably be your best options. Why should you not ignore the lawsuit?

First, when you do not respond, the complaint will become a "default judgment" roughly 30 days after it was served. That means the Court will find for the law firm of the credit card company suing you without you ever appearing in Court. The default judgment happens automatically. Does this seem unfair? Of course! But, it's a fact, so act accordingly.

A holder of a default judgment will have 20 years to "execute" on the judgment. This means they can take the default judgment and place a lien on a bank account, a car, your personal property, or even your home. Once this happens, you cannot transfer your home without the judgment holder getting paid. A lien on your bank account can occur at any time without your prior notice. You can literally lose an entire pay check (or two) before you realize what happened (hint: if there is a default judgment against you, stop your automatic deposit). You will receive service from the Court if a judgment holder attempts to put a lien on your home. If this happens, contact us immediately.

The lawsuit will not go away, so even if you don't have property now, it can be placed on after-acquired property. It can also prevent you from passing on property unencumbered to your children and heirs if you do not take action.

Another thing to point out briefly (to be discussed further in another set of posts)... the statute of limitations for collecting on a debt (4 years in Pennsylvania) does NOT apply to default judgments. Even if you had a proper statute of limitations defense, it must be raised BEFORE the deadline to answer the original complaint.

A second issue, even if you don't have any property to lien (right now) this default judgment will most likely destroy your credit. Clients I meet with are often concerned about the effects of bankruptcy on their credit score. I tell them a default judgment does FAR worse to their credit. They are like a malignant growth that constantly harms your credit by sending negative reports that don't go away.

So, if you do not respond, bad things happen. Liens and damaged credit are sure to follow. Contact us to determine if you are a candidate for bankruptcy or a debt negotiation. I frequently meet with clients in this situation. I can help.

Next, I will look at how bankruptcy deals with creditor lawsuits that have become, or will become, a default judgment.

Credit Card Lawsuits, Part II: What Constitutes a "Response"

In a previous post, I discussed how long you have to respond to a credit card lawsuit (quick review... 20 days to respond, with 10 additional days normally given by the Court). That leads to the next question: What actually constitutes a response?

A response means formally answering the charges filed in the initial complaint by the "Plaintiff" (the credit card or collection company). This requires you to file an answer in the court where the complaint was filed. Your answer could be quite simple, but if it has any hope of succeeding, it should follow a form acceptable to the court, it should include any filing fees, and it should exert some type of defense.

The most common defenses used in credit card lawsuits are statue of limitations defenses or challenging the sufficiency of the credit card company's complaint. You should consult an attorney for legal advice regarding the raising of defenses, and also to make sure your answer is filed properly.

Regardless of your defense chosen, any response to a credit card lawsuit will need to be filed formally. This means you can not simply call the court or write a letter denying the charges. You certainly should not try to contact the judge directly. Also, contacting the law firm suing you will not be considered a proper "response", even if you speak with an attorney and begin negotiating a settlement agreement. Only a formal answer filed in the appropriate court will constitute a "response".

If you think you are not liable for the debt you are being sued on, or if you have not used the credit or made a payment in over 4 years... contact us! It might be worth filing a formal response. Occasionally, credit card lawsuits are filed too late, or without all the required documentation. Credit card companies will file the lawsuit hoping you don't know your rights!

Otherwise, there may be a better solution to dealing with the lawsuit, such as a bankruptcy or a settlement agreement. I can help with both, and I'll discuss both options in a later post.

The next posts on the subject of credit card lawsuits will deal with the hearing date and what happens when you DON'T formally respond.