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What happens to your credit cards when you file for bankruptcy?

On Behalf of | Dec 7, 2022 | Bankruptcy

Bankruptcy is one of the only legal methods of protecting yourself from intense collection activity like lawsuits. People who have lost control over their unsecured debts or worry about aggressive collection activity like repossession or foreclosure related to secured debts often file for bankruptcy to regain financial control and protect their assets or income.

Of course, filing for bankruptcy will affect what kind of credit you can use, which can be a challenge for those with unbalanced budgets. What will happen to your credit cards when you file for personal bankruptcy?

Most lenders will close your accounts

Businesses that provide financial services or that actively collect on debts typically have specialty service subscriptions through the credit bureaus that help them track bankruptcy filings. As soon as someone with an account at their company files for bankruptcy, these companies will receive warnings to cease collection activity because of the automatic stay.

At that point, those lenders will very likely freeze or close an individual’s credit cards. In some cases where you have a good relationship with the lender, you may be able to negotiate an arrangement with them ahead of time to continue using a revolving line of credit during your bankruptcy. Otherwise, you typically need to prepare for the immediate closure of your credit cards and the impact that will have on your budget.

You can discharge what you owe

If your bankruptcy is successful, you can theoretically discharge the entire balance due on your unsecured lines of credit, including all of your credit cards. Even if you owe thousands of dollars, you will no longer have an obligation to pay the company back, and they will no longer be able to engage in collection activity related to those debts.

A few weeks to a few months after your bankruptcy discharge, you will likely start getting letters in the mail from credit card companies. While the cards they offer might require annual fees, necessitate security deposits or charge high interest rates, you can potentially start using and paying off lines of credit monthly and establishing a strong credit history that way.

The short-term inconvenience that comes from closing your lines of credit or only qualifying for mediocre cards will pale in comparison to the benefits of ending the collection activity you’ve endured and discharging your remaining balances. Understanding what happens during personal bankruptcy may help you decide if filing is the step you should take next.