Bankruptcy's Effect on Credit Card Interest Rates
Generally, bankruptcy raises a consumer's credit card interest rates. It certainly is a negative mark on the credit report. But, many debtors have already severely impaired their credit score before filing bankruptcy, and having their debts discharged could actually have the effect of improving their credit scores. Nevertheless, after filing bankruptcy, it should be assumed that higher-than-average credit card interest rates will apply for several years.
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Credit Before Bankruptcy
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As a result of delinquent payments or charge-offs before filing bankruptcy, it's likely a debtor will have experienced rises in interest rates and reductions in available credit, if not outright cancellation of lines of credit. Thus, a debtor's credit can be severely damaged even before filing for bankruptcy. If the debtor still qualifies for credit, interest rates are likely to already be above 20 percent. Those who file for bankruptcy early, before significantly damaging their credit, probably will experience a more severe spike in interest rates (and decline in credit score) than others, but less overall damage (and ultimately lower rates).
Reaffirmation
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Credit card debt is not necessarily affected by a Chapter 13 filing, as long as the minimum monthly payments can fit into the debtor's repayment plan. In Chapter 7, all credit card debt that is not paid off through the liquidation of assets can be discharged. If credit card debt is discharged in bankruptcy, there's a strong likelihood the card will be canceled, but it is possible to prevent the discharge of credit card debt, and thus preserve the credit card, by reaffirming the debt and signing a new agreement after the bankruptcy.
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Secured Credit
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If a credit card is not preserved through the bankruptcy process, the only credit card a recent bankruptcy filer will be able to obtain is a secured card. This is a card with an annual fee that is backed by funds deposited in a secured bank account. Usually the credit limit is determined by the funds deposited with the lender. Purchases with the credit card must be paid monthly as with any other card, but the bank simply appropriates the deposited funds in the event of failure to repay. Because the credit is secured by the deposit, the lender does not have to charge an exorbitant interest rate, but it is likely to be in the mid- to high teens.
Normal Credit
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After about 18 months in good standing with a secured card, it's possible for a bankruptcy filer to transition to a normal credit card. It's possible for the interest rate to actually increase at this point, since the filer is switching from secured credit to unsecured credit. The benefits of switching, however, include eliminating the annual charge and getting back deposited funds. Assuming that the borrower pays the balance in full each month, the rise in interest rates will not be felt. The borrower can ask that the credit card interest rate be reduced after each six to twelve months in good standing.
Clearing the Credit Report
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Bankruptcy stays on a credit report for 10 years, but the delinquent payments and charged-off debt is removed after seven. It's likely, then, that a decline in credit card interest rates will be experienced during this period, as the negative marks fall off the report and the overall credit score rises. Until the filing finally disappears from the credit report, the borrower should expect to pay approximately two to four points more than someone who's never filed for bankruptcy.
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