Today, having a credit card in your wallet is commonplace, and many people have more than one. Credit cards, when used properly, can be a good tool to build your credit score, make purchases online and handle day-to-day tasks such as booking a hotel room or buying an airline ticket. However, credit is only a good tool if used with caution. If you pay off the balance every month (and not just the minimum payment) and don’t continuously max out your available credit, it’s a way to build up your rating and show the credit granting world that you’re not a lending risk.
But what about those who use credit to survive and have no alternatives but to continue to use credit to pay the bills. The reality is that although we hear stories about over-spenders, the majority of Canadians are caught in a debt cycle where credit keeps them afloat. Once their debt burden becomes too much to handle on their own, many seek expert help, turning to debt solutions such as bankruptcy or consumer proposals. For all of these individuals, one question is common: “can I keep one credit card, if the balance is zero?” For so long, credit has been a life line for this person and it can be hard to imagine handling their expenses without it.
Can I keep my credit cards during bankruptcy?
When you file for bankruptcy, by law, you must hand over all credit cards to your trustee. You cannot continue to use them, nor can you keep one, even if there is no balance owing. Don’t panic. This process is to ensure that new debts are not accumulated that will not be included in your bankruptcy. Keep in mind that bankruptcy is designed to eliminate your debts and that once you start the process, creditors must cease to charge interest on the existing debt, freeing up your cash flow to focus on your monthly bankruptcy payments and necessary living expenses.
Doug Hoyes and Ted Michalos talk about surviving without the use of a credit card during bankruptcy in this video:
While you are an undischarged bankrupt, if you apply for credit you are required to tell any creditor that you are in a bankruptcy (and chances are, they’ll see you as a risk and turn down the application). Furthermore, if you use a credit card during your bankruptcy, your creditor can make an application to the court to be omitted from the bankruptcy and have the debt repaid in full.
When you file for bankruptcy, you must attend two credit counselling sessions designed to help you make a plan, discuss your budget and inform you about the dangers of over-use of credit. Whether by necessity or over-spending, Canadians’ reliance on credit can lead to a debt spiral that never ends. By taking the first step to get help with your debts, and to make a plan for your finances, you can stop the debt spiral and get back on track. Therefore, holding on to a credit card throughout the process is counterproductive.
If you are facing overwhelming credit card debt, it is best to deal with that debt now. You can live without credit cards because you’ve made a plan to deal with your debt. After your bankruptcy, you can begin the process of rebuilding your credit, apply for a new credit card (usually a secured credit card at first) and begin to use that credit wisely the second time around. If you need more information about credit card debt or how a bankruptcy can help to eliminate your debt, contact a Toronto bankruptcy trustee to book a free consultation. We’ll review your situation, explain all of your options and help you make a plan for the future.