Can You Keep Your Credit Cards in a Bankruptcy?

Many bankruptcy filers wonder whether they are entitled to keep one or several credit cards open to handle emergency financial situations. The legal conventional wisdom here is pretty clear. In general, you may not.

However, if you've maintained a credit card at a zero balance for a long period of time, you may not have to report it along with your list of creditors during filing. That said, if you've recently paid off your balance to get it down to zero, not only can this action precipitate challenges to the legality of your bankruptcy, but it can also be considered illegal, since in effect, you're preferencing one creditor (your credit card issuer) over other creditors. Repayment ordination is the trustee's job.

Of course, your “zero balance” credit card may be cancelled regardless, since credit card issuers tend to punish card holders for filing for any kind of bankruptcy, even if the bankruptcy doesn't directly impact their relationship with said borrowers. It is possible to keep your credit cards without reporting them and hope to squeak by. But this is a bad strategy -- not only is illegal and unethical, but it can also ruin your chances to discharge other massive unsecured debts in your name.

Similarly, it may be tempting to run up lots of credit card debt in the month or two prior to filing for bankruptcy, comforted by the knowledge that such unsecured debt will be discharged once you file. However, rapid credit card activity near the filing of a bankruptcy may be construed by the court or the trustee to be out of bounds, and either those debts may be excluded from discharge or, worse, the entire bankruptcy may be nullified.

In most cases, your best bet is to wait until the bankruptcy filing has cleared and then work with a debt management consultant to rebuilt your credit piece by piece. In the months and years immediately following bankruptcy filing, you likely won't be eligible for top-tier or even middle-tier credit cards.

But with a good fiscal strategy -- one that doesn't involve incurring lots of short-term debt and that requires you to pay back creditors almost immediately after you borrow money -- you can begin to erase the stigma of the bankruptcy and generate “clean slate” credit that may eventually put you back in the realm of a good to high FICO score.