Using Credit Cards Before Bankruptcy Can Cause Serious Problems
If you are in financial trouble, you may be resorting to using credit cards to pay living expenses, pay debts, or just keep your head afloat financially. However, that understandable position can wind up getting you in some trouble if you are thinking about filing for bankruptcy anytime soon.
Limits on Pre-Bankruptcy Charges
As you can imagine, it would be easy for someone to go on a shopping spree with a credit card, knowing they’ll never have to pay it off because they are planning on filing bankruptcy in the coming weeks. To avoid this, bankruptcy law is tough on people who use credit cards shortly before filing for bankruptcy. Unfortunately, these rules also end up affecting people who innocently use credit cards because they need to do so.
As a general rule, if you use a credit card for $600 or more in non-necessary (luxury) items or services within 90 days of filing your bankruptcy, or you get a cash advance for $875 or more within 70 days of filing, the transactions will be presumed to be fraudulent.
Creditors rarely challenge a debtor’s right to discharge a debt, but if the above limits and time frames are met, they can and do file complaints challenging discharge.
That means that if a creditor challenges the charges or asks the court to determine if the debt you just incurred is dischargeable, the court assumes that the charges were made fraudulently, and thus are not dischargeable. This makes it your responsibility to show that you did not use the credit knowing that it would be discharged in a bankruptcy, that you did not use it knowing you would never pay it back, or that you did not use the card with any intent to defraud anyone.
Factors Courts Will Look At
The more that is charged on cards, and the closer to the bankruptcy, the more likely it will be a challenge will be filed by a creditor, and the harder it will be for the debtor to show that the charges were made innocently. Courts will also see if the charges were made after the debtor visited an attorney (which would indicate fraud).
Courts will also see what the debtor’s financial situation is—the worse the situation, the more likely the charges may be essential, and thus, necessary and therefore not fraudulent. Conversely, purchasing luxury goods like travel or jewelry or a non-necessary car may be seen as not essential, and fraudulent. The court will also look at the debtor’s normal spending habits to see if the charges are common, or whether they are unusual or out of the ordinary.
Many debtors who are challenged by creditors are not seeking to defraud anyone. Just because a creditor challenges your discharge on the basis of fraud does not mean that you committed fraud. Still, the best practice is to avoid using those credit cards as soon as possible and definitely stop using them the moment you start thinking about bankruptcy.