What happens to airline credit card holders if the airline goes bankrupt?

Reader Questions are answered twice a week by TPG Senior Points & Miles Contributor Ethan Steinberg.

The aviation industry is quite cyclical, with new airlines popping up and others going bankrupt on a semi-regular basis. Unfortunately, the ongoing spread of the coronavirus is creating unprecedented financial stress in the industry, and a number of airlines are facing the looming threat of bankruptcy if they can't secure financial aid in the near future. TPG reader Andrew wants to know what happens to airline credit card holders in the event the airline goes bankrupt ...

[pullquote source="TPG READER ANDREW"]Given that airline bankruptcies are on the rise, what would happen to a cobrand card holder during an airline's bankruptcy (and what happens to the miles they've earned). Richard Branson is claiming that Virgin Atlantic will go bankrupt without government support. If that happens, what would happen to Bank of America cardholders in the scenario?[/pullquote]

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This is a great question Andrew and one that many people are likely wondering about. Let me begin by saying that each bankruptcy is different, as local laws in an airline's home country can affect the order in which different creditors are dealt with.

This question really has two parts, so let's start by looking at the miles you earn on a cobranded airline card. While the miles are given to you by the issuing bank (in this example, Bank of America) as a reward for spending on your credit card, they are deposited directly into your frequent flyer account with the airline. This is why you can cancel a cobranded airline or hotel card without fear that your miles will disappear, as long as you make sure to wait until after your first account anniversary.

So far we've only had one major bankruptcy since the pandemic started, that of Virgin Australia. The airline entered administration (similar to bankruptcy protections in the U.S.) and almost immediately suspended redemptions in its Velocity frequent flyer program. Interestingly enough Velocity members can continue to earn miles, so in this case my guess is cobranded cardholders wouldn't see much of a change. If a loyalty program were to disappear entirely, that would be an issue between you and the airline, not you and the bank, which held up its end of the bargain by issuing you miles after each monthly statement.

The second part of Andrew's question has to do with the card itself, and again there are really two main options for what the issuer can choose to do here. The first is to close your account, a logical step if the product you have with them is no longer relevant. This can have a negative impact on your credit score, especially if it's an older account, so you may want to preemptively reach out to the bank about product change options to keep your account open.

The other option is that the bank could convert your credit card into another equivalent product, a step for which there is significant precedent in the past. Most likely they would give you a "core" card that earns cash back or transferable points as opposed to selecting another cobrand partner to set you up with, but this has the added benefit of keeping your account open and letting you decide what to do.

Related: The best airline credit cards

Bottom line

If an airline goes bankrupt, there are really only two options for the bank issuing cobranded credit cards: close all the accounts, or try and keep the customers by converting their cards to another equivalent process. Each bankruptcy plays out so differently that it's impossible to predict what will happen in a specific case, but hopefully this question will remain hypothetical for most people.

Thanks for the question, Andrew, and if you’re a TPG reader who’d like us to answer a question of your own, tweet us @thepointsguy, message us on Facebook or email us at info@thepointsguy.com.