Credit Cards: Before, During and After Bankruptcy (or Proposal)

Posted in Credit Repair
Posted by Benny Mendlowitz, CPA, CIRP - LIT

When you file for bankruptcy or make a proposal to your creditors, you must turn over all credit cards to your trustee, who will then return them to your credit card companies; that is the law (paragraph 158(a.1) of the Bankruptcy and Insolvency Act and Directive #3 issued by The Superintendent of Bankruptcy).

Even if you have a zero balance on your card, this rule applies. The only exception to this rule is if the card you hold was issued to a third party (for example your employer, spouse or parent) and the third party confirms that you may continue to use the card. All of these comments apply to proposals as well as bankruptcy.

During your bankruptcy, it is an offence under the Bankruptcy and Insolvency Act to obtain credit without disclosing the fact that you are an undischarged bankrupt or in a consumer proposal. This means you will not likely be approved for a regular credit card during your bankruptcy or proposal.

We know that it is difficult to function without a credit card, particularly during a proposal which can last for a longer period of time. Try making a hotel reservation or buying an airline ticket without having a credit card and you’ll know what I mean.

One option is to apply for a secured credit card.  For example, Home Trust VISA allows you to obtain a card with limits between $500 and $10,000. You must put down a security deposit for the amount of your limit in full. Each month, you pay off your balance in full, and the transaction is reported to the credit bureau, thereby re-establishing your credit. It is important to note that if you are currently bankrupt or in a proposal you must disclose this in the application.

While we understand that a credit card is convenient and sometimes necessary, we strongly advise against using any credit card as a form of payment. If you have filed for bankruptcy with Hoyes, Michalos, you will have received two financial counselling sessions in which credit repair and re-establishing your credit post-bankruptcy is discussed at length. We always emphasize the use of a credit cards as a substitute for cash, not a method of supplementing your cash flow.

If you have credit card debt and want to know how it could be affected by bankruptcy or a consumer proposal contact a local Trustee in Bankruptcy to book a free consultation.