Danger Will Robinson!: Credit Card Use Leading Up to Bankruptcy
Posted Jan 05 2010 in Wink and Wink by @winkshesaid
Most people considering filing for bankruptcy are dealing with credit card debt. This is no surprise considering the wide availability and often terrible terms of revolving credit: compounding interest on unpaid balances, late payment fees, over-limit fees, teaser rates that skyrocket unexpectedly, jacked-up interest rates based on late payment of a completely unrelated debt. I mean, really, the banks have made a science out of tricking and trapping the credit card consumer. It’s no wonder so many people find that there is no possible way they will be able to pay off their credit card balances.
Credit card bills are one of the most easily dischargeable types of debt in bankruptcy, usually. However, problems can arise when you use your credit cards close to the time you file for bankruptcy. Using credit cards after you have decided to file bankruptcy or have seriously considered filing for bankruptcy can have serious negative effects on your bankruptcy case.
Luxury Goods and Cash Advances
There is a specific section of the Bankruptcy Code that deals with purchases for luxury goods and cash advances in the 90 days before filing for bankruptcy. Section 523(a)(2)(C)(i) says that consumer debts for luxury goods owed to a single creditor and totaling over $550 incurred within 90 days of filing for bankruptcy are nondischargeable (meaning that bankruptcy does not get rid of them). Additionally, cash advances which all together total more than $825 taken within 70 days of the bankruptcy filing are nondischargeable under the same section of the Code.
It’s pretty cut and dried, if you made the charges for luxury items or took the cash advances, you are stuck with them. Bankruptcy cannot help unless you can wait to file to remove your case from the 90 or 70 day look-back period. But even then, there is another section of the Bankruptcy Code that can give you problems.
False Statements and Fraud
Section 523(a)(2)(A) holds that any debt for money, property or services obtained by false pretenses, a false representation, or actual fraud is not dischargeable in bankruptcy. This section is often used by credit card companies to object to their debts being discharged in bankruptcy. Their argument is basically that a person who uses credit when insolvent knows they cannot repay the debt and therefore commits fraud. The closer that credit card use gets to the date you file for bankruptcy, the stronger the credit card company’s argument becomes.
In fact, when dealing with such cases brought by creditors (these are called Adversary Proceedings and they are basically a trial with witnesses and exhibits, which means they cost you money) the Court will look at a list of factors when deciding whether the credit card use amounts to fraud.
The test under the law is called a “totality of the circumstances” test. That means the Court looks at evidence related to this list of factors and then makes a decision based on that evidence:
(1) the length of time between the charges made and the filing of the bankruptcy;
(2) whether the debtor consulted an attorney regarding bankruptcy prior to the
charges being made;
(3) the number of charges made;
(4) the amount of the charges;
(5) the financial condition of the debtor at the time the charges were made;
(6) whether the charges were above the credit limit of the account;
(7) whether the debtor made multiple charges on any given day;
(8) whether or not the debtor was employed;
(9) the debtor’s employment prospects;
(10) the debtor’s financial sophistication;
(11) whether there was a sudden change in the debtor’s buying habits; and
(12) whether the purchases were made for luxuries or necessities.
In practice, large amounts of credit card charges right before filing for bankruptcy are NOT GOOD. They have been held by bankruptcy courts to be fraudulent and therefore not dischargeable.
Therefore, if you are considering filing for bankruptcy it is time to stop using your credit cards. This is easier said than done for many people, but it is important. Once you file for bankruptcy, you will no longer have access to those credit cards. So, if you think bankruptcy is your best bet for wiping out debt and getting a new beginning then you need to be able to live without using credit for the time being.
For those who do have recent credit card usage that will likely cause problems in a bankruptcy, the usual solution is to wait, wait, wait. It is better to get some months away from the charges before filing. The longer you can wait, the better, especially if you can continue to make minimum payments to those creditors to show that you made the charges in good faith (it looks especially bad to make a bunch of charges and file bankruptcy without paying back a dime).
If that is not a good option for you, usually because you are facing a judgment against you and wage garnishment, then it is very important to meet with a bankruptcy attorney to discuss your likelihood of success against a claim of fraud from your credit card company.
The bottom line, however, is beware of using your credit cards if you are seriously considering bankruptcy. It’s not a true fresh start if your debt follows you through to the other side.
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