Some contracts contain a clause that could affect how credit card debt gets treated in bankruptcy
Have you ever read a credit card contract in full? Most people haven’t, even though we all know that we really should read all the fine print before signing a legal document of any kind.
As the LA Times reported last month, reading your credit card contract is important because it just might contain something similar to this little stink bomb of a clause:
“You grant us a security interest in all goods you purchase through the use of the account, now or at any time in the future and in all … proceeds of such goods.”
If you find this kind of “security interest” clause, it basically means that the bank issuing the credit card is reserving the right to repossess any items you’ve purchased—or the proceeds you’ve made from selling those items—if you don’t pay your credit card bill.
Most banks stopped using security interest clauses in the 1990s, after Sears was accused of using the clause to unfairly pressure people into making payments and then had to pay $273 million to customers to settle the charges. However, a few banks, such as Comenity Capital Bank, still include it in agreements for store credit cards. Comenity is a leading issuer of store credit cards and counts brands like Ann Taylor, J. Crew, and Pottery Barn among its partners.
What This Has to Do With Bankruptcy
Credit card debt is almost always unsecured debt, meaning there is no collateral backing the loan. This means that if you file bankruptcy, the lender will just have to write off the unpaid debt as a loss. By contrast, if you had a secured debt that was backed by collateral, such as a mortgage or a car loan, the lender would have something to confiscate if filed bankruptcy and chose not to reaffirm (continue paying) the loan.
When a store credit card has a security interest clause in the contract, things can get more complicated because the debt is not totally unsecured any more. The bank has the ability—at least on paper—to take something from you if you default on the debt. Whether or not they will actually act on this ability is another question. For example, if you defaulted on a store card after buying a $200 dress from Ann Taylor, Comenity probably isn’t coming for it. But if you bought a $2,000 Pottery Barn couch, they might.
Need Advice About Bankruptcy for Credit Card Debt?
If you are considering filing bankruptcy to escape from credit card debt, California Bankruptcy Relief is here to help. As your bankruptcy attorney we will work hard to help you secure maximum relief from your debts. Call 951-755-1000 now for a free bankruptcy evaluation.
