31 Jan Pre-Bankruptcy Planning – Potential Problems With Credit Card Use Prior to Filing Bankruptcy
If you are like most bankruptcy debtors, the difficult decision to seek legal counsel about filing a case may be months in the making. In an effort to avoid bankruptcy, you may be considering any number of non-bankruptcy options, including informal payment plans, refinancing of your house or borrowing funds from friends or relatives. Regardless of whether bankruptcy is a likely or a remote option, you should be very careful about turning to credit cards as a way to generate cash. In some cases your use of credit cards for purchases or cash advances can greatly limit the effectiveness of bankruptcy relief. Here is what you need to know.
The credit card industry was one of the biggest sponsors of the October, 2005 changes to the nation’s bankruptcy laws. Specifically, credit card issuers lobbied hard for changes to the law that would limit the discharge of credit card debts. There are two Bankruptcy Code sections that come into play with regard to credit card debts:
Bankruptcy Code Section 523(a)(2) provides that consumer debt owed to a creditor totaling $500 or more for “luxury” goods and services may not be discharged if that debt was incurred within 90 days prior to the bankruptcy filing. Cash advances totaling more than $750 within 70 days prior to filing are non-dischargeable in bankruptcy.
As a practical matter, this means that if you use credit cards for any reason within the 3 months prior to filing, your case will be red-flagged by the credit card issuer. Even if you have a defense (i.e., that your purchases were not for “luxury” items but were for food or medical care) you may find yourself in (expensive) litigation, if the credit card issuer files a non-dischargeability complaint.
What if your last use of your credit cards was four or five months ago? Does that put you in the clear? Unfortunately, the answer to this question is “not necessarily.” Bankruptcy Code Section 523 also allows credit card lenders to object to discharge if you incurred the credit card debt with no reasonable expectation of repayment.
For example, if you transferred your balance of $5,000 from one card to another eight months ago to get a better interest rate, the credit card company holding the balance may very well object to your attempt to discharge the debt in bankruptcy by arguing that at the time you made the balance transfer you knew or should have known that you would not be in a position to repay the debt.
Here are several pre-bankruptcy activities by debtors that frequently trigger objections from credit card companies:
- one or more balance transfers of large ($1,000+) balances
- any use of your credit cards within one year of filing for “out of the ordinary” purchases. Out of the ordinary purchases can include anything from tax payments to furniture purchases to vacations to cash advances.
- less than two or three months of payments on the cards after a cash advance or a big purchase
- use of your credit cards after suffering an injury or job loss
- sudden change in the pattern of your credit card use
- request for several new credit card accounts within the year prior to filing
In real life, honest, hardworking debtors sometimes meet with their lawyers needing to file bankruptcy despite a less than desirable recent credit card use. Here are some ideas about how to reduce the chances of objections from credit card companies even if you have been accessing your credit cards in the months prior to filing:
create a history of regular payments. Even if you only pay $25 or $50, doing so for two or three months prior to filing may help avoid a dischargeability complaint
- if you absolutely have to use a credit card, it may be wise to use one and concede that you will not get out of that debt, as opposed to risking non-dischargeability for several credit card accounts.
- keep your receipts so you can prove that your use of the cards was for essential purchases
- if you made any large purchases, you may be able to return the items for a refund back to the card
- often credit card companies will not object to dischargeability of your total balance is less than $10,000 or $15,000 – ask your lawyer about trends in your filing district
Generally, you will improve your chances for a desirable bankruptcy result if you speak to a qualified bankruptcy lawyer as soon as you realize that your finances are in trouble. You may discover that waiting a few months and following your lawyers pre-bankruptcy planning advice will serve you well.
Jonathan Ginsberg, Esq.
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