Credit cards are very convenient financial tools. They allow people to spend money that they do not yet have based on the income they generate or the assets they own. Lenders charge a premium interest rate in many cases for these revolving lines of credit. However, so long as people pay their credit cards in full every month, the interest they accrue will be negligible.
Unfortunately, carrying a balance on credit cards is a relatively common practice. Many people cannot balance their budgets or afford common expenses without credit cards. They may worry about what bankruptcy will mean for the credit cards that they regularly use.
Lenders close lines of credit during bankruptcy
Unsecured debts like credit card balances are typically subject to discharge during bankruptcy. Therefore, lenders want to prevent people from accruing more credit card debt when they have begun the bankruptcy process. Oftentimes, lenders will close or freeze credit cards and other revolving lines of credit the same day that someone files for bankruptcy. People will need to cover their cost-of-living expenses without credit cards until they complete the bankruptcy process.
Thankfully, credit cards are often the first type of credit available after a successful bankruptcy. People can obtain secured cards often within a few weeks of their discharge and larger lines of credit when they have established a history of paying their secured cards on time. Typically, most people will qualify for secured credit cards shortly after completing bankruptcy and better credit cards within a year or two.
Understanding how bankruptcy affects different financial tools may help people better time when they file and more effectively prepare for the bankruptcy process itself.