Handling Bankruptcy

When a cardholder files for bankruptcy, an issuer must stop the account from accruing new charges and adjust how the outstanding balance is treated. Lithic supports two distinct workflows through the financial account status and substatus fields, so you can model the two most common consumer bankruptcy chapters:

Choosing the right workflow

• Use the charge-off workflow (CHARGED_OFF_DELINQUENT) for Chapter 7, where the debt is discharged and the account is permanently closed.
• Use the interest & fees pause workflow (INTEREST_AND_FEES_PAUSED) for Chapter 13, where the balance persists under a repayment plan, new charges stop, and the account can later be resumed.

Both workflows are driven by a single endpoint:

PATCH /v1/financial_accounts/{financial_account_token}/update_status
Content-Type: application/json

{
  "status": "SUSPENDED",
  "substatus": "CHARGED_OFF_DELINQUENT",
  "user_defined_status": "CHAPTER 7 FILING 2024_12345"
}

A financial account has three statuses — OPEN, SUSPENDED, and CLOSED — and the substatus records the reason. The optional user_defined_status is a free-text field you can use to reference the bankruptcy case number or an internal note.

Chapter 7 — Charge-Off Workflow

Chapter 7 discharges the debt, so the balance is written off and the account is permanently retired. You model this by suspending the account with a charge-off substatus: CHARGED_OFF_DELINQUENT (loss due to non-payment) or CHARGED_OFF_FRAUD (loss due to fraud). For a bankruptcy discharge, use CHARGED_OFF_DELINQUENT.

Financial account behavior

Charge-off is a terminal path. Once an account is SUSPENDED with a charge-off substatus:

• It cannot return to OPEN, and the charge-off reason cannot be changed.
• New spend is blocked. Because the account is suspended, authorizations and outbound transfers are rejected;
• The only permitted forward transition is to CLOSED.

Send the charge-off request once the discharge is confirmed:

PATCH /v1/financial_accounts/{financial_account_token}/update_status

{ "status": "SUSPENDED", "substatus": "CHARGED_OFF_DELINQUENT" }

Loan tape behavior

Charging off an account changes the loan tape in two ways.

1. Interest and fees stop entirely. From the charge-off date forward, the daily loan tape calculates no fees. APR and balance metadata are retained on the record for reporting, but no new interest or fee amounts are added to the balance.
2. The outstanding balance is written off. On the next loan tape run, the remaining balance is split into its principal, interest, and fee components and each is posted as a loss write-off credit against internal charge-off accounts (CHARGED_OFF_PRINCIPAL, CHARGED_OFF_FEES, CHARGED_OFF_INTEREST). These postings are idempotent, so a rerun loan tape will not double-post.

Once the balance reaches zero (either because it was already zero or because the write-off cleared it), the account is automatically moved to CLOSED with the charge-off substatus preserved, so the reason for closure remains visible on the account. No further loan tapes drive status or fee changes after this point.

The net effect: the customer's obligation is removed from the active book, the loss is recorded in the appropriate internal ledger accounts, and the account is retired.

Chapter 13 — Interest & Fees Pause Workflow

Chapter 13 restructures the debt under a court-approved repayment plan rather than discharging it. The balance survives and the customer keeps paying it down, but interest and fees must stop while the plan is in effect. You model this with the INTEREST_AND_FEES_PAUSED substatus.

Unlike charge-off, this workflow is fully reversible — the balance is preserved, and the account can be resumed if the plan completes or the filing is dismissed.

Financial account behavior

The account must be SUSPENDED to be paused. Set both fields together:

PATCH /v1/financial_accounts/{financial_account_token}/update_status

{ "status": "SUSPENDED", "substatus": "INTEREST_AND_FEES_PAUSED" }

Attempting to apply INTEREST_AND_FEES_PAUSED to an account that is not SUSPENDED is rejected.

While paused:

• All debit operations are blocked — new fees, transfer debits, and returned-payment fees are rejected.
• Payments (credits) still post normally. The customer can continue making payments under their repayment plan, and payment allocation follows the standard principal → fees → interest order.

Loan tape behavior

The pause takes effect the day after the substatus is set — the day it is set completes normally, and every loan tape from the following day onward reflects the pause:

• Interest: calculated as zero. The APR, daily rate, and balance are preserved on the loan tape for transparency, but actual_interest_charged is 0.00 and no interest compounds into the balance.
• Late fees: not assessed, regardless of payment due dates.
• Days past due: continue to increment normally — pausing does not cure delinquency, it only stops new charges.
• Statements: billing cycles continue to close and statements still generate, showing $0 new interest for the paused period.
• Minimum payment: continues to be calculated so the repayment plan can proceed.

Resuming the account

When the repayment plan completes (or the filing is dismissed), reopen the account in a single call, clearing the substatus at the same time:

PATCH /v1/financial_accounts/{financial_account_token}/update_status

{ "status": "OPEN", "substatus": null }

Interest and fees resume starting the day after the account is reopened, based on the current balance. There are no retroactive charges for the paused period — if the account carried a $1,000 balance untouched for 90 days, it resumes at $1,000, not at $1,000 plus 90 days of back interest.

You can verify the current state at any time with GET /v1/financial_accounts/{financial_account_token}, and inspect the daily interest, fee, and balance impact through the account's loan tapes.