Will Bankruptcy Cancel My Cell Phone Contract?

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The question "Will bankruptcy cancel my cell phone contract" has two different answers, depending upon the bankruptcy chapter you're filing. It also brings up another issue -- whether you're trying to keep your cellphone or trying to get rid of an unwanted cellphone contract.

Cell Phones and Chapter 13 Bankruptcies

In a Chapter 13 bankruptcy, you're filing a debt repayment plan with the court. Because you're asking for debt reduction or more time to repay your debts rather than simply declaring you can't pay them, the court allows you to keep your possessions. This includes your cellphone.

In the repayment plan you file with the court, you would normally the payments on your cellphone contract among your expenses. It would be unusual for the court to deny you the right to continue those payments. Arguably, your ability to make and receive cell phone calls increases your income earning potential, and losing that ability diminishes it. One bankruptcy lawyer writes that even in Chapter 7, where the trustee has the right to demand the liquidation of the contract and the repossession of the cellphone, he has never had a bankruptcy trustee make the demand.

Getting another cellphone contract may be tricky, however. An Experian article on cellphones and bankruptcy points out that many cellphone carriers will decline to make a contract with someone going through either Chapter 7 or Chapter 13 prior to discharge. Even after discharge, you may find it difficult to find a carrier who will extend a contract offer since your credit score will be severely lowered. In that event, you may have to use prepaid cellphones until your credit is repaired, which can take several years.

Cell Phones and Chapter 7 Bankruptcies

In a Chapter 7 Bankruptcy, you're asking the bankruptcy court to discharge most of your debts. In return, the bankruptcy trustee has the right to seize all but certain exempt assets and to sell them to partially satisfy those debts.

A cellphone is not among those automatically exempt assets. However, you can petition the court to exempt both your cell phone and the cellphone contract as assets essential to your financial recovery.

Cellphone Contract Cancellation Opportunity

Another bankruptcy attorney brings up the interesting point that a Chapter 7 bankruptcy filing provides an opportunity to dump an unwanted cellphone contract. Although it's likely that the bankruptcy trustee will grant an exemption of your cell phone from asset repossession if you ask, if you don't he has no choice and must repossess the cellphone and cancel the contract. If your liquidity problems are so serious that you've filed for Chapter 7, getting out of the cell phone contract and going to a simpler prepaid cellphone may be the better outcome.

Canceling a cellphone contract entails penalties and charges that prevent most customers, even if they don't like their carrier, from canceling. Since in Chapter 7, you're canceling almost all debt anyway, the cellphone company has no ability to exact those penalties and charges. In comparison to the overall impact of a Chapter 7 bankruptcy on your credit, the additional negative impact of reneging on your cancellation charges may be comparatively slight.

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