Tag Archives: credit card

Will I Lose Everything I Bought With Credit Cards If I File for Bankruptcy?

bankruptASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am getting ready to file bankruptcy. What happens to all the stuff I bought using my credit cards? Every single thing I own was bought during the past ten years using credit cards and department store cards. I mean, the shirt on my back down to the socks on my feet, to this computer, the tires on my car, the bed I sleep in, and the desk and chair I’m sitting in. Does all of it get taken away? 

I have this silly cartoon image of myself left standing in a barrel because everything, including my clothes, gets taken away when I get to court.   

Yours truly, 

Larry

Larry, My Good Man,

I have awesome news for you. There is a hardware store close to the bankruptcy court and they’re having a big sale on barrels. On your way to court, buy the one you like. But don’t pay with a credit card.

Seriously, the image of people walking out of bankruptcy court wearing barrels is something we won’t ever see. In most cases you don’t have to give up the things you bought on credit. Although there are some exceptions.

Credit Card Security Agreements

When you “buy” something with a credit card, when do you actually own it? It all depends on whether or not the credit card agreement contains a “security agreement.”

A security agreement is the same thing you have when you get a car loan. Your debt is “secured” by the item you owe the money for. The item you buy serves as collateral for the debt (it’s as if legal title on the item is being held hostage until you finish paying for the item). If you don’t pay as agreed, the creditor can repossess the item because you don’t yet own it.

To see what you might have to give up, you need to check your credit card contracts for security agreements. Here’s what’s typical:

  • Major credit card issuer. Ordinarily, there won’t be a security agreement if the lender is a major credit card issuer like Visa, Mastercard, or American Express.
  • Store cards. Usually, there will be a security agreement if the lender is a department store, like Best Buy or Macy’s, or a jewelry store.

What Happens to Items Subject to a Security Agreement?

When you file bankruptcy, the creditors with security interests are entitled to either get paid or get the property back. But often you can keep the property, for several reasons.

  • You can usually negotiate very good settlement terms on personal property items that you still want to keep. (Learn more in Reaffirming Secured Debt in Chapter 7 Bankruptcy and Redeeming Property in Chapter 7 Bankruptcy.)
  • Creditors rarely repossess items that are old or obsolete.
  • Department stores typically exercise their security interest only against major purchases, what they call “white goods,” like washers and refrigerators. (In the old days, major appliances came in any color you wanted, so long as you only wanted white.) Department stores are not interested in taking back your clothing, mattresses, and inexpensive items like video games and dvds, which are called “soft goods.”

For practical information on negotiating a good deal on property you want to keep in bankruptcy, see Tips for Getting a Great Reaffirmation Agreement in Bankruptcy.

When Do You Own an Item You Charged?

When you make a payment towards your department store account, the store credits the payment against the oldest unpaid balance. When you have paid off the oldest item, you own it. The store then applies your next payments to the next oldest balance, and so on.

Items you charged on your major credit cards belong to you, not the store, because the major credit card bank has already paid the store for you. Your major credit card debts will normally be discharged in bankruptcy, and all the stuff like ordinary appliances, furniture, barrels, and clothing will be your “exempt” property.

Losing Nonexempt Property That You Charged on Your Credit Card

Even if you own an item, however, you might still lose it in bankruptcy. If the item is not “exempt,” the bankruptcy trustee in a Chapter 7 bankruptcy can sell the property and use the proceeds to repay your creditors. Most everyday items (like clothing, furniture, and the like) will be exempt. But if you have expensive jewelry or something else that is not exempt through your state laws, you may have to give it up. (Learn more about how bankruptcy exemptions work.)

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Can a Credit Card Debt Be Reported on a Child’s Credit Report?

Real bank or piggy-bank?ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I got a Chapter 7 discharge about a year ago. Long before filing bankruptcy I got an extra credit card for my daughter to use. At that time the bank assured me that I would be the only person liable for charges on the card. My daughter just got her credit report and the credit card account appears as a charge off. 

How did the company get her social security number? And didn’t it violate the agreement it made with me? My daughter is now 17 years old, and I’m sick over the thought that I ruined her credit. 

Yours truly, 

Marjorie

Dear Marjorie,

I suggest that your daughter dispute the debt on her credit report. It’s not hard to do. You can learn how in Nolo’s article How to Dispute Errors on Your Credit Report.

In her dispute, she should state two things:

  • that the credit card account is not hers, and
  • that even if it was, she is under age 18 and is now voiding the contract, so does not owe the credit card company anything

I think this credit dispute will be quickly resolved in her favor. If it is, that annoying item will disappear from her credit report.

Here is a little background on each of these arguments.

The Credit Card Account Is Not Hers

The credit card company told you that you would be the only one liable for the charges, so the account never belonged to your daughter. Your daughter should state these facts in her dispute.

What If the Agreement Did Hold Your Daughter Liable?

But what if the credit card agreement did hold your daughter liable?  It’s likely you no longer have documents proving the contrary. And credit card companies do issue extra cards to authorized users and hold the user liable. In this case, because the bank has her social security number, is it possible the agreement said she would be liable?

A Minor Can Void a Contract

Even if the credit card agreement did hold your daughter liable for the credit card debt, she can void the contract before she turns 18.

Because the law says that minors lack the capacity to enter into a contract, it gives minors the option to either (1) honor the contract, or (2) void the contract before he or she turns 18.  (There are a few exceptions: Minors cannot void contracts for necessities, like food and shelter.)

Your daughter should immediately notify the credit card company and the credit repair agency that she is voiding the contract.  She can do this by stating:

“While I believe that I never had a contract with [credit card company], if I did, I am now voiding the contract.  I am under the age of 18.”

At that point, since there is no contract in place, your daughter does not owe the credit card company anything, and she can dispute the entry on her credit report.

A Novel Argument?

And if you want to try something new, consider this. Last July, the new Children’s Online Privacy Protection Act Rule (COPPA Rule) took effect in California. If you use the above tactics and still cannot get the item removed, you could hit the credit card company with a demand to remove the item on the ground that it is violating COPPA by publishing information pertaining to the identity of a minor.  It might be a stretch to say that a credit report (which has a limited viewing audience) is “publishing” information about a minor and therefore violating COPPA, but it doesn’t hurt to make the argument. Rather than test new legal waters, perhaps the credit card company (or the credit reporting agency) will back down and remove the item.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Paying Off Credit Card Debt v. Filing for Bankruptcy

CreditCard2ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am making my credit card payments on time, but they are a substantial amount each month. Would it be a good idea to file for Chapter 13 bankruptcy to pay them back? Would that look better on my credit report than if I filed for Chapter 7 bankruptcy? And will the credit card accounts have to be closed once they’ve been paid in full, or will I get to keep them? 

Thanks, 

Wally

Dear Wally,

I predict you’re going to feel great by the time you finish reading the bankruptcy advice I have for you.

The Credit Card Debt Trap

You make your credit card payments on time, but you don’t see any progress in getting them paid off. You are not the only person in this situation, and that’s because of credit card interest. Consider this: If you have a balance of $5,000 on your credit card and are paying 14% APR, it will take you 22 years to pay it off. That assumes you always make the minimum requested payment, on time.

Can I cheer you up some more? Over that 22-year period, you will end up paying a whopping $5,887 in interest, on top of the original $5,000 balance. That’s a total of $10,887 to buy something that cost only $5,000. (And it’s likely that whatever you bought is long gone by the time you pay off the balance.)

Paying the Debt Off Outside of Bankruptcy

So what’s the best way to avoid this scenario? My first choice for you would be to avoid bankruptcy by paying the debt down yourself. To do this, however, you’ve got to make more than the minimum payment each month.

Let’s go back to the example above. Let’s say your minimum monthly payment on the balance was $100.  If you paid $240 per month, you would pay the debt off in just two years. You’d still pay $761 in interest, but you’d save yourself 20 years of debt payments, and $5,126 in interest.

(For tips and strategies to get out of high credit card debt, visit Nolo’s Managing Credit Card Debt topic area.)

Discharging the Debt in Bankruptcy

If you can’t step up your monthly payments, and you have no better alternative, bankruptcy can be a great way to deal with debts. It’s true that bankruptcy will damage your credit. However, almost all of my clients already had miserable credit by the time they began considering bankruptcy. Thus, they had nothing left to lose.

Keep this in mind though:  If good credit is extremely important to you, then do not file any kind of a bankruptcy case. If getting out of debt is more important than your credit, you should consider Chapter 7 or Chapter 13 bankruptcy. Your credit will look the same regardless of which chapter you file. The credit card accounts will remain closed, even if you pay them back under Chapter 13.  (To learn more about what happens to credit card debt in bankruptcy, visit Nolo’s Credit Card Debt and Bankruptcy topic area.)

For further guidance on your particular situation, consult with one or two experienced bankruptcy lawyers. You should be able to find lawyers who will give you free consultations.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer. 

Find Leon on Google+

Got a Consumer Complaint?

If you have a complaint about your credit card company, student loan holder, mortgage lender, car loan lender, or bank, you can log your grievances on the new Consumer Financial Protection Bureau  (CFPB) website.

The CFPB is now fielding complaints in the areas of:

  • credit cards
  • student loans
  • mortgages
  • car loans
  • bank accounts or services

To file a complaint, visit the complaint center on the CFPB website at (www.cfpb.gov/complaint.)

Once a complaint is lodged, the CFPB confirms that the lender has in fact done business with the consumer. The lender then has 15 days to respond to the complaint and 60 days to address the problem. To learn more about the complaint process, see the CFPB’s Consumer Reports: A Snapshot of Complaints Received.

The CFPB has already created a database that compiles credit card complaints, and has made this information public. The database doesn’t disclose the consumer’s name, but does disclose how the credit card company dealt with the issue. The CFPB plans to have similar databases for the other types of complaints in the future.

I Am an Authorized User on My Dad’s Credit Card. What Happens If I File for Bankruptcy?

ASK LEON

This is the first blog post in our new series, Ask Leon, where bankruptcy expert Leon Bayer will answer real-life bankruptcy questions from consumers.

Dear Leon,

I have a credit card in my name on my father’s credit card account. If I file for bankruptcy, will this freeze his card or affect him in any other way? The credit card account is his — he pays the bills.

 — Sandy

Dear Sandy,

The best way to avoid trouble is for your father to take you off the credit card account until your bankruptcy is fully completed and the case is closed. After that, your dad should be able to add you right back on the account.

If you file for bankruptcy while you are affiliated with his credit card account, there is a major risk that the credit card issuer will close the account, even if your father keeps it current. That could hurt your father’s credit, and deny both of you future access to that source of credit.

— Leon

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.