The average American relies on credit cards for emergencies. If their car breaks down or their washing machine stops working, they know that they can cover those expenses with a credit card now and then pay off the balance as soon as they have enough income to do so.
Some people become so accustomed to using credit cards for regular expenses that they find it very difficult to wait until payday to pick up groceries or cover utility bills. Partially as a result of how difficult it can be to make ends meet without them, the possible impact that bankruptcy could have on someone’s credit cards and other personal lines of credit can deter people from filing for bankruptcy.
Lenders close accounts the day someone files
The courts send out notices to the credit bureaus every day providing information about who filed for bankruptcy. This process is largely beneficial to filers because it helps prevent collection activity against them. However, it also means that people can expect an immediate change to their revolving lines of credit.
Most lenders will immediately freeze if not outright close accounts held by someone who has filed for personal bankruptcy. Lenders do this to prevent someone from increasing the balance that they owe when they have already made it clear they will not make any more payments on their financial obligations.
People generally have to accept a complete and total loss of revolving credit until after they resolve their bankruptcy proceedings. For someone filing a Chapter 7 bankruptcy, that might mean multiple months without usable credit. Those going through the Chapter 13 process may go somewhere between three and five years with limited credit options.
Thankfully, credit card lenders will begin soliciting someone shortly after a bankruptcy discharge. Cards that require a security deposit and impose annual fees, as well as high interest rates, are often available within a few weeks of someone’s discharge.
Those who are proactive about rebuilding their credit as quickly as possible after bankruptcy can usually qualify for better credit cards within a year or two of their discharge. Within four or five years, most people will be able to obtain better terms and larger lines of credit provided that they keep their existing accounts in good standing.
Preparing for the likely impact that bankruptcy will have on credit cards can help people overcome the financial challenges that result from personal bankruptcy in order to more fully benefit from the opportunities and relief that the process provides.