A prepaid debit card is a plastic payment card that you can use to make purchases much like a credit card.
You often see these cards for sale at supermarket checkout aisles.
They differ from credit cards, however, because you must first load money onto the card before you can use it.
In most cases, prepaid debit cards will not allow you to spend more money than you have deposited onto the card.
Netspend and Green Dot are two of the larger prepaid card companies, although there are many others.
Some employers even use prepaid debit cards for employee payroll.
These cards have two important differences from credit cards when it comes to bankruptcy.
Prepaid Cards Are Not Borrowing
If you borrow money shortly before filing for bankruptcy, it can create problems with your bankruptcy case.
This is because:
- The money you borrow could become nondischargeable.
- In some situations, the court may even deny your bankruptcy discharge altogether.
How Do You Buy Things Then?
So, if borrowing money before bankruptcy isn’t a good idea, you still need a way to pay for everyday expenses.
What are your options?
This is where prepaid debit cards can be helpful.
These cards have an account number similar to a credit or debit card, but because the money loaded onto the card already belongs to you, you are not borrowing money when you use it to make purchases.
Prepaid Cards Are Hard to Garnish or Levy
As of now, we have not seen creditors successfully garnish or levy prepaid debit cards in Minnesota.
Although the law does not prevent creditors from garnishing or levying these cards, they often appear to have difficulty locating them.
One reason may be that prepaid cards:
- Typically do not appear on credit reports.
- Are not commonly associated with Social Security numbers.
Are There Any Other Reasons to Use Prepaid Cards?
Keep in mind:
A creditor must first locate an asset before it can garnish or levy it.
Another reason prepaid cards are often difficult to levy is because there are so many different companies that issue them.
In Minnesota, there are only a handful of major banks where many people maintain checking accounts, making those accounts easier for creditors to locate.
By comparison, there are hundreds of prepaid debit card providers, making it much more difficult for debt collectors to determine where someone may have funds.
Please Note: This Could Change
Creditors may eventually develop better methods for locating and levying prepaid debit cards.
Disadvantages of Prepaid Debit Cards
Prepaid debit cards should generally be viewed as a temporary solution for several reasons.
1. Fees
Many prepaid cards charge fees for deposits, withdrawals, transactions, or even simply keeping the account active.
2. No FDIC Insurance
Traditional checking accounts are generally protected by FDIC insurance, which covers deposits up to applicable federal limits if the bank fails.
Depending on the provider, prepaid debit cards may not offer the same protections. If the company issuing the prepaid card becomes insolvent or experiences operational issues, accessing your funds could become difficult.
For example, RushCard, one of the larger prepaid card providers, experienced a major service outage in October 2015.
3. They Don’t Report to Credit Bureaus
If rebuilding your credit is one of your goals, prepaid debit cards probably aren’t your best long-term option.
Most prepaid cards do not report payment activity to the credit bureaus, so using one won’t help establish or rebuild your credit history.
For many people, filing bankruptcy and then responsibly using a checking account and traditional credit products is a better path toward rebuilding credit.
How Should You Protect Your Money From Creditors?
The most reliable way to protect your money from creditors is to file Chapter 7 bankruptcy or Chapter 13 bankruptcy, if bankruptcy is appropriate for your situation.
A prepaid debit card may help protect your money in the short term, but filing bankruptcy is often the best long-term solution for getting your financial life back on track.
Conclusion
If you’re struggling financially and relying on prepaid debit cards, it may be worth exploring whether bankruptcy is the better option.
Contact Life Back Law Firm P.A. to discuss your situation and learn whether bankruptcy may be right for you.
Visit lifebacklaw.com or call our office today to find out how we can help.