What Happens to a Zero-Balance Credit Card in Bankruptcy?
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What Happens to a Zero-Balance Credit Card in a Bankruptcy Filing?

Typically, when you have credit cards with high balances, they are included in your Chapter 7 or 13 filing and the debt is either repaid or written off through a Chapter 7 discharge.

But the presence of a zero-balance credit card in bankruptcy filings raises questions for many potential bankruptcy filers. While filers are required to list all of their creditors when they file their petition, it is sometimes unclear whether card issuers are considered creditors if a filer owes them nothing.

Yet leaving a card issuer (or any creditor) out of bankruptcy paperwork could be considered fraudulent in certain situations and may lead to a case being dismissed.

How to Handle a Zero-Balance Credit Card in Bankruptcy Filing

Credit cards with no balance generally fall into one of two categories:

  • Recently paid-off cards: Filers who repay credit card balances in the months directly preceding filing bankruptcy will likely need to list these cards in their bankruptcy petition. If they do not, the payment to those creditors could be viewed as preferential, meaning that the filer chose to repay one creditor over others. Preference in repaying debts is illegal in bankruptcy; the court may take action to undo the payment to make sure all creditors receive a fair amount.
  • Long-term zero-balance credit cards: Filers who have had no balance on a credit card for a period of several years before a bankruptcy filing may not have to list this card in their bankruptcy petition. This is because a zero-balance credit card that has been maintained for a long period does not suggest preference in its repayment. Rather, it shows that the filer has maintained an account without often using it.

Bankruptcy Fraud and the Zero-Balance Credit Card in Bankruptcy Filing

The penalty for those found guilty of improperly omitting creditors in a bankruptcy petition can be severe: fines and jail time are not uncommon. That's because omitting creditors may be considered an act of bankruptcy fraud, a crime that the court takes seriously.

But the laws that govern which creditors must be listed and which can be omitted are complex. That's one reason the U.S. Courts system, which regulates bankruptcy courts, recommends working with a bankruptcy lawyer during the process of filing for bankruptcy.

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