Secured Credit Cards and Bankruptcy: What You Need to Know

Bankruptcy courts treat secured and unsecured debts differently. Secured debt is backed by collateral property. The creditor can take that property if you don’t pay. Car loans work like this. Unsecured debt, like medical bills and most credit cards, has no collateral backing it.

Secured credit cards fall into a different category than regular credit cards. Understanding this difference helps you make smart decisions during bankruptcy. You can also use secured cards to rebuild your credit after filing.

What Is a Secured Credit Card?

Building good credit requires on-time monthly payments. But getting credit approval is tough when your score is low. You’re stuck in a loop: your score is too low for loans, but you need loans to raise your score. Secured credit cards break this cycle.

When you apply for a secured card, you pay a cash deposit to the lender. Your credit limit typically matches your deposit amount. The deposit becomes collateral for any debt you charge. The lender can take some or all of your deposit if you don’t pay.

You can use secured cards anywhere that accepts credit cards. After about 12 months of responsible use, many issuers refund your deposit. They convert your card from secured to unsecured status.

Is a Secured Credit Card Right for You?

You might struggle to qualify for traditional cards if you have a low credit score. Missed payments, defaults, and repossessions hurt your approval odds. New credit users with thin files face similar challenges. Secured cards have much lower qualification requirements. The deposit reduces the lender’s risk substantially.

Secured cards help you improve your credit score by building positive payment history. Credit limits are often low, and interest rates run high. Don’t use secured cards to finance major purchases. They work best for small purchases you pay off monthly.

How to Choose the Best Secured Credit Card

The secured card market is competitive. Many cards offer rewards programs, cash back, and introductory rates. Start your search with your local bank or credit union. Existing account holders sometimes get better offers than national lenders provide. Consider these factors when comparing cards:

• Interest rates: Lower rates save you money. Check when introductory rates end and what the permanent rate becomes.

• Reporting policy: Cards only help your score if lenders report payments to credit bureaus. Choose lenders who report to all three major bureaus regularly.

• Added fees: Skip lenders charging application fees or high annual fees.

What Happens to Secured Credit Card Debt in Bankruptcy?

Traditional credit cards are unsecured. Most unsecured debts get eliminated in bankruptcy. You can’t keep traditional cards after filing, even with current payments or zero balances. Secured cards are different. Bankruptcy law treats them like other secured debts. Treatment varies by bankruptcy chapter.

Secured Credit Cards in Chapter 7 Bankruptcy

Your Chapter 7 paperwork includes a Statement of Intention form. You list all secured debts and indicate your plans. You can keep the collateral and continue payments, or surrender it and eliminate the debt.

Keeping your secured card requires current payment status. Your lender may request a reaffirmation agreement promising future payments after bankruptcy. If you surrender the card, any balance gets wiped out. The lender closes your account and keeps your deposit up to the debt amount.

Secured Credit Cards in Chapter 13 Bankruptcy

A Chapter 13 case centers on your repayment plan. Your plan must list all secured debts, including secured cards. Keeping your card means paying the balance plus interest through equal payments over 36 to 60 months. Plan interest rates usually run lower than your cardholder agreement rate. Surrendering the card means specifying zero payment on the debt in your plan.

What Happens to Your Security Deposit?

Your security deposit is the collateral securing your card debt. List it on Schedule B with your other property. Exemption laws protect some or all of your property from liquidation in bankruptcy. Each state has unique exemption laws. Federal exemptions also exist.

Most secured card deposits are small enough to claim as fully exempt. Include your deposit with other claimed exemptions on Schedule C in your bankruptcy paperwork. A bankruptcy attorney can help you protect your assets and navigate the exemption process.

How Secured Credit Cards Help Rebuild Credit After Bankruptcy

Bankruptcy eliminates many debts and gives you a fresh financial start. You’ll need to invest time into rebuilding your credit and raising your score. Establishing consistent on-time payments is the most effective score-boosting strategy. You need a loan or credit card to build payment history. Secured cards remain accessible even when traditional loans aren’t.

Make every payment on time to maximize credit benefits from your secured card. Use the card regularly but keep balances small and manageable. A smart strategy is charging minor monthly expenses like utilities or fuel. Pay off the full balance each month. More on-time payments mean better credit scores.

Consider additional credit-building methods alongside your secured card. Credit builder loans work well. You might also enlist a co-signer for traditional loans or cards. Our partner Kikoff offers accessible credit-building tools designed for people recovering from financial setbacks.