What Happens to Credit Card Rewards in Bankruptcy?

Your best bet may be to cash out your rewards before filing for bankruptcy. Otherwise, you'll likely lose them.
Anisha Sekar
By Anisha Sekar 

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When you’ve spent months or years racking up credit card rewards, the thought of losing them in bankruptcy can be devastating. While you do run the risk of those rewards disappearing, it may be possible to save them. Here’s what you need to know about your rewards as you face credit card debt and bankruptcy.

How to protect your rewards

If you want to be certain to keep your reward points or miles, experts recommend you try to use them or cash them out before you file for bankruptcy or default on the card.

That said, most general credit card reward programs don’t allow cardholders to use their reward points if their account is in default, so you may find that your points are frozen if you’re already in trouble with credit card debt. Even if you’ve kept up with your payments, if you owe a balance on the card, your card will be considered in default once you file your bankruptcy petition. This means you may never get to use your rewards.

If you have a co-branded airline credit card, you may have more luck. The card issuer isn’t the only one that controls the rewards; the travel loyalty program has some ownership over the miles, too, depending on which program you have. Before you file for bankruptcy or default on the card, transfer the points to the airline or hotel loyalty program to get them safely out of your credit card account.

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You won’t necessarily lose your card

When you’re filing for bankruptcy, you have to include a list of all of your creditors with whom you have debts. However, if you have a credit card with no balance, it’s technically not a debt and doesn’t need to be listed. This means your lender won’t be sent a notice of your bankruptcy, and you likely won’t be forced to surrender the card to your trustee and can possibly even keep the account open.

However, your issuer may find out about your bankruptcy in other ways, such as through a credit bureau, so your card isn’t completely safe from being canceled. You might be able to keep the card by reaffirming it after the bankruptcy. This means you sign a new contract with the credit card issuer that says you are personally liable for it again. Keep in mind, though, that this removes the benefit of the debt being discharged by the bankruptcy, so it might not be the smartest move for your situation, unless you find this is the only way to keep your rewards.

Considering whether it’s an asset

When you file for bankruptcy, you also have to declare your assets. Some experts believe you don’t need to list reward miles or points as an asset, especially since some of the fine print says the points have no actual value. However, other experts recommend you do disclose your rewards since you stand to benefit from them, especially if it’s a large number of miles or points.

It’s also rare for bankruptcy trustees to ask about frequent flier miles, since it would be challenging for them to administer. Additionally, most of the programs include language that says the miles or points can’t be transferred or sold, which also makes it unlikely a bankruptcy trustee would take them from you. If you’re uncertain what to do in your situation, it’s best to consult with a bankruptcy lawyer.

One important thing to note: If you cash out your rewards before you go into bankruptcy and redeem them for gift cards or goods, note that these are now assets that you should list on the bankruptcy petition.

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