Secured Credit Cards in Bankruptcy

four credit cards piled togetherCreditcards.com recently discovered that some credit card agreements are providing the lender with authority to seize items purchased if the buyer does not pay for them in full. Credit card debt is typically classified as "unsecured debt," which means no collateral was pledged to secure the loan. However, provisions that allow the lender to repossess goods may change this classification.

According to the research by Creditcards.com, more than 200 publicly-filed card agreements give the bank a "security interest" in items purchased by the cardholder. Examples of such cards include stores backed by Capital One, such as Costco and Big Lots.

The right to repossess purchased goods can remain in effect, even if the cardholder files a Chapter 7, Chapter 11, or Chapter 13 bankruptcy. Most consumers may not be aware that their credit card agreements contain these provisions.

Among Creditcards.com's other findings were the following:

  • Cards that delay interest payments for 6 months or longer are growing in popularity. However, these cards typically contain language that charges build up interest if a payment is missed.
  • Approximately 70% of card agreements apply variable interest rates linked to the U.S. prime rate, and a few link to Europe's LIBOR index.
  • The use of mandatory arbitration clauses have increased in credit card contracts, which prevents consumers from going to court or joining forces with other unhappy consumers in a class action against the lender.

How can this impact your bankruptcy filing? If your credit card contract contains a security interest clause, household goods typically exempted from the bankruptcy process may not be protected. In other words, the lender may be allowed to repossess those items even though you filed for bankruptcy.

The good news? Unlike other types of secured loans, threats to repossess collateral behind credit card loans are rarely followed through with by the lender. The goods that the lender can seize are typically not worth the cost, time and effort it takes to repossess them.

Please keep in mind that every case is different. If you purchased items with a secured credit card, and have questions about what will happen to them if you file bankruptcy, please contact our office to schedule a no-cost consultation by completing the form on this website or calling us at (954) 280-5066.

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