Sometimes when filing, a Client will want to keep a credit card, either for emergencies, or because they “like” that company for some reason. Sometimes it is possible to keep a credit card open when filing. But to do so, two things must be true: First, it must have a zero balance to avoid being listed as a creditor. If you owe even $1.00, you will have to list it. Second, you cannot have paid more than $599 on the account in the last 90 days, or the total payments will need to be listed in the Statement of Financial Affairs. If you paid $300 two months before filing, and another $300 one month before filing, we will have to report this. The Trustee will then decide whether to get the money back from the Card Company. If the Trustee does get the money back, you will still lose the Credit Card. And even if the Trustee does not get the money back, the lender is likely to close the account when it runs your credit as part of its regular account maintenance and discovers the bankruptcy.
Another consideration is that while it is sometimes possible to keep a credit card, it is likely to cost you more than simply opening a new card. Your current Credit Card may have a better interest rate than you will get with new cards, but as long as you pay off new charges in a reasonable timeframe, the different interest rate will not make as big a difference as you might think. Often, the additional amount you will pay in interest will still be less than what you need to spend to bring the current card to a zero balance so that you can try to keep it.
Consider this example. Assume you have a card with a balance owed of $378.00, and an interest rate of 14.9%. Assume also that your payments in the last ninety days totals less than $222. You could then pay off the card before filing. And because it would have a zero balance, and your total payments would be less than $600, you would not have to report the card in the bankruptcy. Thus, keeping this card will cost you $378. A new card will not cost you anything, and you will not have a risk of them closing it the moment they learn of the bankruptcy.
But perhaps you are concerned about what a higher interest rate will mean. Using the national average interest rate of 27.5% for your new Credit Card, we can thus compare the charges between the two cards. If you charge $600 on each card, and payoff the full balance in 3 months, it would break down like this:
|Current Credit Card:||———-||New Credit Card:|
|1st month’s payment: $207.45||1st month’s payment: $213.75|
|2nd month’s payment: $204.97||2nd month’s payment: $209.17|
|3rd month’s payment: $202.49||3rd month’s payment: $204.59|
|Total interest paid: $14.91||Total interest paid: $27.51|
The difference is only $12.60! And remember that you will have to pay $378 to keep the card. That means you would have to borrow $18,000 before the difference cost you more than the $378.00 you can save right now by including them in the bankruptcy. You would have to borrow $600 from them 30 times over before it started costing you money! Plus, as you use the new card your credit will improve. When it does, you could get a card at a lower interest rate and eliminate any loss altogether.
For these reasons, I do not recommend trying to keep a credit card by paying it off before filing.
To discuss this and any other issues regarding bankruptcy, call (480) 243-7300 or (928) 468-3600 to schedule your consultation today!