What are the Rules About Filing Bankruptcy After Recent Credit Card Use

Most bankruptcy lawyers will tell you that credit card contributes to most consumer bankruptcy case filings. Often, overwhelming credit card debt is the primary reason for a filing. For example, if you have $10,000 or more in credit card debt, and you send in only the minimum payment of 2% of the balance each month, you will need over 50 years to pay off your debt. You can run your own numbers using an on-line credit card interest calculator.

Many people use credit cards as a means of survival. Frequently, therefore, I see clients who desperately need to file bankruptcy but have used credit cards recently. Not surprisingly, recent credit card use prior to bankruptcy is a problem – but just how big of a problem is it?

I recently received this question from a reader of my blog:

Hello, I had a question about chapter 7 bankruptcy. If I incur a lot of debt on my credit cards (like $30,000 worth) four or five months before declaring bankruptcy (for business expenses), could this be considered Bankruptcy Fraud? In Massachusetts, the lookback period for credit cards is 90 days, but can it be extended further?

Here is my answer: Bankruptcy Code Section 523 addresses this situation. Section 523(a)(2) provides that:

consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable;

The Code also provides that the term “luxury goods or services” does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.

However, Code Section 523(a)(2) also includes another test to determine the dischargeability of credit card debt. The following debts are non-dischargeable:

money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive;

So, what the Code provides is that non-essential credit card debts to any one creditor totaling $500 or more and incurred within 90 days prior to filing are presumed non-dischargeable. And credit card debts of any amount, incurred at any time prior to filing may be deemed non-dischargeable if the creditor can prove that the debt was incurred under false pretenses (i.e., that the consumer used the card when he knew or should have known that he would be unable to pay back the debt).

The 90 day/$500 debt to any one creditor is a fairly easy argument for the credit card companies – those are hard to defend. The false pretenses/false representation issue is more difficult for a credit card company to win because they have to prove what you knew or should have known.

Remember, however, that if the credit card lender files an objection, you have to pay a lawyer to respond and defend it – which can get expensive.

My practice, therefore, is to hold off on filing for as long as I can following my client’s last use of credit cards. I also encourage my clients to make at least the minimum payment for several months while we are waiting to demonstrate good faith.

If you find yourself using credit cards to pay household expenses, that should be a signal to you that you have a debt problem and need to speak with a bankruptcy lawyer. If you find yourself in a bankruptcy lawyer’s office, you should think very carefully about using credit cards thereafter.