Chances are that back when you first began using credit cards, the credit card companies were never shy about offering you more cards and larger credit lines. They acted this way because they wanted you to live beyond your means and take on more debt than you could reasonably pay off on a monthly basis. These companies do not make money when customers charge low amounts and pay off their balances in full; they make money when customers carry high balances and pay hefty interest rates. Then, once these same consumers are maxed out and finding it difficult to make even the minimum payment, what do the credit card companies do? They raise their interest rates even higher!
Based on these business practices, it should be no surprise that the credit card companies actively sponsored recent legislation making it harder than ever to declare bankruptcy—even for those who need it most.
Legally, there are two types of bankruptcy available to individuals: Chapter 7 and Chapter 13. Most people think of bankruptcy in terms of Chapter 7, which means almost all current debts are canceled, and after they file, they owe nothing. They also get to keep all of their current belongings. The credit card companies are obviously against Chapter 7, because it means they will never see any more money from those customers.
The more common type of bankruptcy (and the one preferred by creditors) is Chapter 13. A person filing for Chapter 13 bankruptcy has their debts, income, and assets carefully looked over by a court representative. The court then decides how much, if any, of the debt they still have the ability to pay, and then sets up a strict payment plan (often, money is taken directly from paychecks). Any and all personal assets, from a car to furniture and clothing, can be ordered by the court representative to be sold to pay off your debts.
While the credit card companies would prefer bankruptcy did not exist, they greatly prefer it when people file for Chapter 13, because the companies have a chance at receiving even more money. New legislation passed in 2005 made it harder than ever to qualify for Chapter 7, which means even more consumers may be forced to sell their vehicle or their family home to satisfy debts—debts that in many cases were actually paid off years ago, with only the years of high interest payments left.
The Real Consequences of Bankruptcy
After filing for bankruptcy, you no longer have your old debts, but you also no longer have any of your old lines of credit. For someone who has been living beyond their financial means for a long time, this new situation can be a painful and difficult shock.
If you filed for Chapter 13, you will start with a five-year repayment plan, as ordered by the court. You will not have access to old credit lines, and have very limited (if any) access to new credit. Shockingly, your bankruptcy does not actually start to count down until the end of this five-year period.
Bankruptcy goes on your credit report, and remains there for up to ten years. (With Chapter 13, the ten years start after your five-year repayment ends, adding up to as many as 15 years in total.) Immediately after filing, your credit score will go down, and for at least the first year getting any new line of credit may be impossible. Over time, your credit score will slowly improve, and you may be eligible for some credit offers. Be wary of opening any new accounts, remembering your earlier debt problems. Remember, you can only declare bankruptcy once every seven years, so no matter what new circumstances come up (medical expenses, death, etc.), you are completely liable for any new debts for at least seven years forward.
Your first credit offers post-bankruptcy will likely be for small credit lines (a few hundred dollars), with high interest rates and usually an annual fee. To get back on track to good credit, open one of these cards only if you are ready for the responsibility. Pay on time, and don't exceed your limit. As time goes on, you will be offered cards with larger credit lines, lower rates, and less or no fees.
