There are a number of myths surrounding credit cards and bankruptcy. Many people believe that because credit cards represent unsecured debt, they can easily be discharged in a Chapter 7 personal bankruptcy case. Another myth is that once you are discharged from bankruptcy, it is impossible to get credit cards and recover your good credit standing. Let’s take a look at each of these myths.
Avoid Fraudulent Credit Card Use
One of the duties of a trustee in a personal bankruptcy case is to look for fraud. One of the best ways to avoid a credit card mistake is to ask your local bankruptcy attorney what is and is not allowed regarding credit cards. Generally speaking, this is a list of actions to avoid:
Keep Using Your Cards
Don’t wait until the bankruptcy petition is filed to stop using credit cards. Once you’ve visited your bankruptcy attorney, that’s pretty clear evidence that you intend to file for bankruptcy protection. Any purchases made when there is no intent to pay back the charges or cash advance can be attacked as fraudulent by the creditor. You could have those purchases removed from the bankruptcy, or the judge could find you guilty of bankruptcy fraud, punishable by up to five years in prison and a $250,000 fine.
More than $875 in cash advances from any single source within 70 days of the bankruptcy filing is presumed to be fraudulent. That means the burden is on the debtor to prove that the cash advances were made for reasons that are acceptable to the bankruptcy court. The creditor must question the cash advance to trigger a separate hearing on the issue.
Any credit card purchase within 90 days of the bankruptcy filing will also be presumed fraudulent if the purchase was for a luxury item. Just what is a luxury item differs from court to court. For example, a bankruptcy court has ruled that a computer is a luxury item. However, if the purchase is for a child who needs the computer for school, a different outcome is possible. The bottom line is to listen to the advice of your bankruptcy attorney and put those credit cards away.
Re-Establishing Credit After Bankruptcy
A bankruptcy is perhaps the most negative item you can have on your credit report. However, most people who decide to file bankruptcy have already had issues with late payments and have a less than stellar credit score. If you follow these steps, you can slowly but steadily improve your credit picture.
Get Credit Cards.
Although credit cards may have contributed to your bankruptcy, there’s no way to improve your credit score without at least a couple of credit cards. You’ll get offers almost immediately, mostly for low-limit cards with high interest rates. To speed up the process, get a secured card. Make sure the card, which is funded with your own money, reports to the three credit bureaus. It’s also important to pay on time and to make sure you never owe more than 20 percent of the total balance on the card.
Check Your Credit Report
The government has made it possible for everyone in the country to see their credit scores once a year for free. You can easily find the free site on the Internet and get your report online. Read your credit report carefully because mistakes are not uncommon, particularly after bankruptcies. Make sure balances that are discharged don’t show up as active accounts. An inaccuracy can take points away from your credit score.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.