Most people would agree that it’s almost impossible to live without a credit card today. We no longer operate in a cash only society, in fact the use of cash to pay for things is on the decline in Canada. Without a credit card you can’t easily book a hotel room or make a purchase over the internet.
If you declare bankruptcy you are required by law to surrender your credit cards. Specifically, section 158 (a.1) of the Bankruptcy & Insolvency Act says that you are required to:
“…deliver to the trustee, for cancellation, all credit cards issued to and in the possession or control of the bankrupt.”
So if you go bankrupt, you lose your credit cards. It’s the law.
Ted: It’s almost impossible to live in our culture without a credit card. So if you’re speaking with anyone, a credit counsellor, debt consultant, a trustee, one of the things you want to ask them is, ‘how am I going to re-establish myself? How am I going to live?’
Doug: ‘If I have to travel, if I have to go with my son’s hockey team and book a hotel, how am I going to do that if I don’t have a credit card’. It’s a valid concern. My advice is well, while you are bankrupt or in a consumer proposal it’s more difficult to have a credit card, so what you’re generally going to want to do is have another family member for example get a credit card and put you on as a supplementary cardholder, you can get a prepaid credit card.
Ted: Prepaid credit cards is like a gift card. You go load it up with money it looks just like a Visa or a MasterCard and you can use it the same way. It’s not a great solution long term but it will immediately get you the credit card that you want. The better solution is something called a secured credit card. Where you put money on deposit, the lender will give you a credit limit on your credit card equal to what the money is you have on deposit, as long as you make your monthly payments the deposit is intact. Usually within 18 to 24 months they release your deposit back to you and so not only have you still got the credit card, but you’ve got money from the savings now returned to you that you can use for something else.
Doug: There are always strategies to deal with whatever the issues are, but you’ve got to focus though on is the big picture. The big picture is you’ve got a huge amount of debt that you’re not able to service, and so by filing a bankruptcy or a consumer proposal you can get rid of that debt, that’s what gives you the ultimate fresh start.
Does that mean during the bankruptcy period I can’t travel, make purchases over the internet, and I’ll have to carry cash everywhere to pay for my daily purchases? Not necessarily.
There are options that can help you survive without your old credit cards
- Use a debit card, and that’s what I recommend for daily purchases. It’s just as easy to buy groceries with a debit card as compared to cash or credit, and it allows you to easily keep track of your spending (it will be on your bank statement every month), and you have no worries about getting into debt (since you can only spend the money in your bank account, unless you have overdraft protection, which is not recommended while you are bankrupt).
- Get a prepaid credit card. You “deposit” money onto the card, and that’s all you can spend. This is a good option because you are not borrowing; you can only spend money you have already saved.
- Use a supplementary card. If credit card is essential, you can ask a family member or friend to get a credit card, in their name, and add you as a supplementary card holder. It’s their card, and they are fully liable for it, so the credit approval is based on their credit, not yours. Of course that also implies that if you overspend and don’t make the payments on the card, your friend or family member is now liable for the debt, so be very careful with this option. I would suggest that the credit card have a small credit limit, be used for emergency purposes only, and be paid in full each month.
- A secured credit card is an option. Offered through several companies, including the Home Trust Secured Credit Card, this is very similar to a prepaid credit card because you must put on a deposit with the credit card company funds in advance. If you want a $1,000 limit on your secured credit card, you must provide a $1,000 deposit. This is a good option because again, you can only spend the money you have already deposited. This type of card has the advantage of beginning to rebuild your credit, because it appears on your credit report as a credit card.
- Save up and plan for bigger purchases. Prior to bankruptcy, debt payments were consuming a big chunk of your paycheque. Bankruptcy payments are usually much lower than what you were paying before giving you an opportunity to make better use of your budget. Here’s an easy budgeting tip: start by putting money into a small emergency fund and save for any larger purchases. Individuals who file bankruptcy are even able to begin to save money right away towards any down payment they may need that can ultimately help them qualify for a lower cost car loan or mortgage when their bankruptcy is complete.
If you’re worried about losing access to your credit cards and other credit my recommendation is to focus on the big picture. If you choose to file bankruptcy to deal with a huge amount of debt your goal should be to eliminate your credit card debt, and not get back into debt again with more credit card debt when the process is finished. That fresh start is your number one goal.
Then, once you have that fresh start, if a credit card is essential, consider your options and pick the option that will meet your objectives, but also prevents you from incurring new, unwanted, future debt.