When it comes to discussing personal finance, filing for bankruptcy can be a delicate topic. It's a situation that many would prefer not to find themselves in, and the consequences can impact various aspects of your life – including your credit cards. As a millennial striving to make informed financial choices, understanding how bankruptcy affects your credit cards is essential. In this blog post, we'll explore the impact of bankruptcy on your credit cards, discuss the process, and provide realistic examples to guide you through this complex topic.
What Happens To Your Credit Cards When You File For Bankruptcy Table of Contents
Understanding Bankruptcy
Bankruptcy is a legal process that provides individuals and businesses the opportunity to eliminate or repay some or all of their debts. It's typically a last resort for those struggling with overwhelming debt in the United States. There are two primary types of bankruptcy for individuals:
- Chapter 7 Bankruptcy: Also known as "liquidation" bankruptcy, this involves dissolving assets and using the proceeds to pay off debts. In some cases, property may be exempt from liquidation, allowing individuals to keep certain assets.
- Chapter 13 Bankruptcy: Often called a "wage earner's plan," this type of bankruptcy allows individuals to establish a repayment plan for their debts. It typically lasts three to five years, during which time the individual makes regular payments to repay the debts.
The impact of bankruptcy on credit cards
When filing bankruptcy, you must provide a list of all your outstanding debts, including credit card balances. Here's how bankruptcy affects your credit cards:
1. Credit Card Cancellations: Once you file for bankruptcy, your credit card issuers will likely cancel your existing accounts. This is because the risk of not receiving payment becomes significantly higher during bankruptcy.
2. Elimination of Debts: In Chapter 7 bankruptcy, credit card debts are usually discharged, meaning you're no longer legally obligated to pay the outstanding balances. However, in Chapter 13 bankruptcy, credit card debts must be addressed in the repayment plan. The amount you pay depends on your income and overall debt level.
3. Difficulty Obtaining New Credit Cards: Post-bankruptcy, obtaining new credit cards may prove challenging due to the negative impact on your credit score. Many issuers may be hesitant to offer credit to someone who has recently filed for bankruptcy.
4. Impact on Credit Score: Bankruptcy damages your credit score, affecting your ability to obtain credit in the future. Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 stays for seven years.
5. New Card Options: After bankruptcy, you might have to rely on secured credit cards or cards designed for those with low credit scores until your credit improves.
What Happens To Your Credit Cards When You File For Bankruptcy Example:
Meet Jack. Jack is a millennial struggling with $40,000 in credit card debt, and he's unable to make monthly payments due to job loss. After careful consideration, Jack decides to file for Chapter 7 bankruptcy.
Jack submits a list of all his debts, including his three credit card balances. His attorney proceeds with the bankruptcy process, and Jack's assets are liquidated. The money from these assets is used to pay off some of his credit card debt, and the rest is discharged.
As a result, Jack's credit card accounts are closed, and he loses his lines of credit. Following his bankruptcy, Jack notices his credit score has dropped significantly, which hinders his ability to obtain new credit cards. He decides to apply for a secured credit card to start rebuilding his credit over time.
Bankruptcy and the loss of credit card privileges can be a daunting experience, but it doesn't have to define your financial future. Understanding the process and knowing what to expect can prepare you for the challenges ahead. If you're grappling with the decision to file for bankruptcy or need more guidance on managing your personal finances, explore more posts from Flik Eco. Together, we can provide the insights and resources every millennial needs to navigate through these complex financial topics.
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