Credit after Bankruptcy

A reader asks...

What happens with my credit cards after filing bankruptcy? Will I still be able to use them? Do I send them back? What if I need a credit card in the future?

A discharge in bankruptcy will wipe away your credit card debt. This means that you will no longer be obligated to repay and the credit card company(ies) are forbiden from ever attempting to collect the debt from you.

Any credit cards that you have now with balances that are discharged in bankruptcy will be closed by the credit card company and you will no longer be able to use them.

However, after the bankruptcy is complete, you may be able to obtain a secured credit card from a bank or credit union. You might may be able to obtain a traditional 'unsecured' credit card, but the limit will be quite low and the interest rate will be very high.

A secured credit card is a 'traditional' credit card with a twist. You deposit money in a financial institution and grant that institution a security interest in your deposit in exchange for the credit card. The financial institution will hold the money that you have on deposit just in case you were to default on the credit card. If you were to default, they would take the money on deposit to payoff the balance on the card and close the account.

For example, you deposit $500 in a savings account at a credit union, the credit union puts a 'freeze' on the $500 and issues you a credit card with a $500 limit.

A secured credit card after bankruptcy is really a good way to go. You get a managable credit line at a reasonable interest rate. This is a good way to rebuild your credit after bankruptcy.