One reader of my Indiana bankruptcy blog posed an interesting question, and the answer might be of help to other readers, I thought:

How are frequent flyer points treated when the owner files personal bankruptcy?

In earlier bankruptcy blog posts (see “Airline Ticket Holders Are Unsecured Creditors In Bankruptcy”), I talked about the opposite situation, where an airline has filed bankruptcy, leaving consumers holding frequent flyer mile accounts.  I explained that, despite an airline’s public relations announcements saying it intends to honor all tickets, it’s really up to the bankruptcy court to decide. Ticket holders are unsecured creditors, last in line to get paid after secured debts are paid. If the airline is shut down by the bankruptcy court, mileage credits become worthless.

Now, what about the status of an individual’s frequent flyer miles when he or she files personal bankruptcy?  As a board certified consumer bankruptcy specialist who helped write the exemptions portion of Indiana bankruptcy law, I want to begin by assuring readers that most people who file bankruptcy don’t lose any of their property.  In general, frequent flyer miles may be used only by the individual named on the account.  That means that, although the miles represent an asset, they cannot be used to pay creditors towards the debts you owe.

However, certain frequent flyer programs allow the owner to redeem points towards a discount on merchandise purchased from participating online retailers. In this case, the trustee could take the vouchers and sell them to someone else, if the contract with the airline allows this.

One of the reasons I thought this reader question about frequent flyer miles was important is that it allows me to clear up a common misconception of bankruptcy as a punishment for people who have mismanaged their financial affairs.  The old concept of punishment, complete with debtors’ prisons, disappeared more than two hundred years ago.  The modern image of bankruptcy is a safety net, designed for helping responsible people who have faced insurmountable obstacles rebuild their financial lives.