Be careful with credit cards if you plan to file bankruptcy
Luxury credit card purchases of $500 or more and made within 90 days of filing bankruptcy are presumptively non-discargeable.
The general rule is that credit card debts are eliminated by filing for bankruptcy. In fact, excessive credit card debt is one the biggest reasons consumers file bankruptcy in the first place. However, it does not follow that all credit card bills will automatically be wiped out in bankruptcy court. You can’t rack up credit card charges on the eve of filing bankruptcy and expect to get a financial fresh start. If you do, a creditor could object and your debts might not be dischargeable, meaning they will remain even after your bankruptcy case closes.
Under section 523 of the Bankruptcy Code, non-essential (luxury) credit card debts to any one creditor totaling $500 or more and incurred within 90 days prior to filing are presumed non-dischargeable. Similarly, cash advances of over $750 within 70 days before filing are presumably non-dischargeable as well.This means that the court automatically looks at large credit card purchases and cash advances, made within the three months leading up to your bankruptcy case, with suspicion.
Similarly, debts incurred at any time prior to filing may not be dischargeable if a creditor can prove that the debt was incurred with no intention to pay. These rules make sense. Going out and buying a flat screen TV on credit two weeks before filing bankruptcy should raise eyebrows. If a creditor notices the purchase, a lawsuit objecting to your entire discharge can be filed. The legal fees to defend a lawsuit of this type will far exceed the fee for a typical bankruptcy case.
What was your “state of mind” when you made the purchases?
Make sure your bankruptcy attorney knows about all purchases of $500 or more you’ve made on credit cards. He or she will likely advise that you delay filing bankruptcy until the 90 day presumption period has passed. After all, it is possible for well meaning debtors to purchase items on credit not knowing they’ll soon be forced into bankruptcy. If this sounds like you, talk to your attorney to make a plan, but don’t get too worried. If you didn’t purchase the items knowing you’d be filing bankruptcy, or after meeting with a bankruptcy attorney, you’ve done nothing wrong. If, however, you purchased items knowing that you’d soon be filing bankruptcy, well that’s criminal bankruptcy fraud, which is a whole different story.
As a general rule, your credit card company won’t have much to complain about if you’ve recently purchased small items and necessities, such as diapers or food on credit cards and soon after file bankruptcy. Although, using high balance credit cards to purchase the bare necessities can be evidence of financial distress sufficient for a bankruptcy, these small purchases do not give creditors a built in objection to your discharge as if you’d made a $500 or greater luxury purchase. In order to object to the purchase of necessities on credit, the credit card company would need to prove that the purchases were made with no intention of repaying the debts.
The real problems usually begin when you purchase luxury items.
If you are currently relying on credit cards to buy the groceries and keep the lights on, it may be a sign that you need to file for bankruptcy. Recent use in good faith does not present a problem, recent use with no intent to pay does. The rule is simple. If you’ve met with a bankruptcy attorney and have decided to move forward with the bankruptcy process, don’t use your credit cards.
Talk to a bankruptcy attorney if you have questions.
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