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Credit Cards and Bankruptcy

The total number of bankruptcy filings in the United States has risen sharply in the last ten years. More individuals and companies are opting for this extreme solution as a way of coping with huge debts. Although the social stigma of bankruptcy is not what it used to be, the procedure is still viewed in the most negative terms by creditors. Filing for bankruptcy automatically precludes you from being able to aquire most types of credit which other people take for granted. As far as credit cards are concerned, however, there are actually realistic options for the aquisituion of these after going bankrupt. Additionally, a number of these options turn out to be the best way to begin rebuilding your credit history after a bankruptcy has been discharged. One should never attempt to file for bankruptcy without a lawyer and without doing significant reading and research on how the procedure works in one's particular state.

There are three main types of Bankruptcy:

Chapter 7:

This is designed for individuals (as opposed to corporations) and is the most popular type of bankruptcy proceeding. It is also the type most feared by creditors. Chapter 7 bankruptcy is, in effect, a liquidation process where a debtor's assets are sold and the proceeds from the liquidation used to pay of debtors. The process is administed by a trustee appointed by the court. The problem here for creditors is that it is often the case that a debtor's assets do not fully pay for the debts accrued. So the creditor merely receives a partial payment. The idea of bankruptcy filing is to protect a debtor from being completely financially wiped out in attempting to pay off creditors. So certain of a debtor's assets are protected and exempt from liquidation. The types of property which are exempt varies from state to state. Chapter 7 can be filed no more than every 7 years. Credit Bureaus will generally not erase the record of a Chapter 7 bankruptcy from your credit report for 10 years after it is first filed.

Chapter 11:

This is not relevant here because it is designed for businesses and not for individuals. Note, however that it is possible for an individual to be required to file for Chapter 11 bankruptcy if the total amount of their debts are greater than the maximum allowed under a Chapter 13 bankruptcy filing.

Chapter 13:

Whereas chapter 7 bankruptcy liquidates a debtor's assets to come up with a financial sum to pay her creditors, Chapter 13 bankruptcy allows a debtor, via the oversight of a court appointed trustee, to set up a repayment plan to pay back his creditors. This is better for the latter because it provides the prospect that they will receive monies owed in full. A repayment schedule is set up which may be for three years or so. The court ensures that you actually have the ability to make these repayments. This means that you must have a job and income which allows you to make required payments within the alloted time. Filing for Chapter 13 helps to protect your assets. After you have made all your payments, the bankruptcy is discharged. Credit bureaus will however normally record this bankruptcy on your credit report for seven years after it is discharged.

Obtaining Credit Cards After Bankruptcy:

A number of credit card companies now specialize in providing accounts for consumers who need to re-establish a credit history after financial disaster. This does not mean that it is easy to find a suitable card, however. Very often, credit cards for such consumers can be very expensive with high annual fees and all sorts of additional charges such as membership fess and so-called 'one-time' or 'set-up' fees. Interest rates are also usually very high and credit limits are low. This is particularly so for the few companies which offer unsecured credit cards to such customers. It is generally a better option to apply for a secured credit card instead (see Differences Between Secured and Unsecured Credit Cards). The charges and fees you would have to pay to obtain an unsecured card for bad credit are usually almost equal to the amount of money you will need to open a savings account (usually about $250.00) with the bank which issues your secured credit card. The difference here is that you get back this savings deposit later when you close your account with the bank. You may even earn full or partial interest on the deposit, depending on the bank and the amount of your deposit.

Secured cards are indistinguishable from unsecured cards and are reported to the credit agencies as unsecured cards are. You can usually raise your credit limit by increasing the amount of your deposit. After you have kept up payments on your new credit card account for about two years, the issuing bank will often offer you an unsecured credit card account.


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