Credit card during bankruptcy is high risk

Dear Bankruptcy Adviser,
Can I keep one credit card for emergency use without listing in my creditors for bankruptcy?
-- Charles

Dear Charles,
This is a question I have been asked by literally hundreds of clients. If you were sitting in front of me in my office I would lean a little closer and say in my "very serious" tone of voice: "Charles, it is crucially important that you are honest about all of your debts. If you are not, it will be possible for an unlisted creditor, that is, your emergency credit card, to claim that you are engaging in fraud, file a challenge with the trustee and possibly nullify your bankruptcy. And you don't want that."

Now, while there is one way you can keep a credit card (which I'll describe at the bottom of this article), most people who try to keep a card or two in reserve know they're doing something wrong. I'm pretty sure that you're not contemplating fraud, Charles, you're just asking a question. However, I want you to know that this is a very big deal.

There are those who attempt to hide credit card accounts, other debts and even valuable assets. One such person was Kelli L. Worth of Cedar Rapids, Iowa.

Ms. Worth filed bankruptcy and discharged $70,000 in debt, but she concealed that she had a sport utility vehicle and money allocated for Botox injections (among other things). Just to show how smart she was, she went onto a local TV show under an anonymous name and told the world that the new bankruptcy laws were a joke and she got away with keeping everything she wanted. Federal investigators watched the tape and matched Worth's story to her case. In September 2006, Worth was sentenced to four months in jail and four more months on house arrest.

There are two lessons here. The first is that some people actually do get away with fraud. The second is that some people do not. Just so all of my readers understand my position, I believe that bankruptcy laws are a means to get a second chance and are a privilege of living in the United States; I have no sympathy for people who get burned trying to take advantage of a system that's already there to help them.

However, just to be thorough, let's run through the options of what can happen if you are carrying a balance with a credit card and you leave this card off of your petition so that you have it in case of emergency.

Consequences of 'forgetting' a loan in bankruptcy filing: • Nothing. This is highly doubtful because all your creditors have to do is look at your credit report to determine if there are any additional creditors you did not list on your bankruptcy petition. But there are so many people in the system that not everyone can be checked, so it is a statistical possibility you can slip through the cracks and get away with it. • Petition amended. If you are discovered to have unlisted creditor(s), the trustee may require you to amend your petition and list the creditor as you should have done in the first place. • Bankruptcy challenged. If you have unlisted creditor(s), especially if you have a large balance or there are other reasons to suspect fraud, the creditors you have listed may file a motion with the court. Your records will receive close scrutiny and you may not receive bankruptcy discharge at all.

The only way you can actually keep a credit card is this: It must have been without a balance for a long time. In other words, you don't have to list a credit card if there's no balance. If you recently paid off the balance and then didn't list it, that's fraudulent behavior. It's known as a "preference," as in, you preferred to pay off one creditor as opposed to the others. Preferring is illegal and the trustee can require those assets be brought back into the bankruptcy proceeding in order to be used for all creditors.

To reiterate, if you have a card that doesn't have a balance and hasn't for some time, you don't need to list it on your petition. Now, suppose the issuer of the card checks your credit because they are thinking of making you an offer for additional credit and they discover that you've filed bankruptcy. Even though you're not carrying a balance, they may think that you're more of a risk and they may close the account. They may not.

The best way to keep a card for emergencies is to get a card, use it for a while, then stop using it. Then, if and when you ever do file bankruptcy, your card with zero balance is less likely to be canceled because you'll have a history of paying your balances. Oh, and whatever you do, don't go on TV to brag about it.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "bankruptcy" as the topic.