If you're having financial difficulties and you have available credit on your credit cards, it may be tempting to take out a cash advance to float your budget a little while longer. However, taking out a cash advance could cause you problems if you end up filing bankruptcy afterward.
Credit card debt is generally dischargeable in bankruptcy. This means that if you obtain a bankruptcy discharge, you will no longer be responsible for your credit card debt. (To learn more about what happens to credit card debt in bankruptcy, see Credit Card Debt & Bankruptcy.)
However, if your credit card debt meets certain criteria, the credit card company can file an adversary proceeding within your bankruptcy case asking the court to make the debt nondischargeable. (To learn more, see our topic on Adversary Proceedings in Bankruptcy.)
If you take out cash advances on one credit card that total more than $950 (as of April 2016) within the 70-day period before you file your bankruptcy, bankruptcy law presumes that the debt is nondischargeable. If your credit card company files a a complaint for nondischargeability, you will have to overcome that presumption. To do so, you'll have to prove to the court that you did not intend to defraud the creditor when you took out the cash advances. Generally that means showing that you intended to repay the debt and that you did not take the money out thinking you could just discharge the debt in your bankruptcy case.
Even if the time period and total cash advance amount requirements are not met, a creditor can still sue you in your bankruptcy if you take out cash advances before you file bankruptcy if it can prove you did so with the intent to defraud the creditor.
Example 1. Angela wanted to buy a formal dress for her cousin's wedding. She found a dress in a classified ad that she liked, but the seller would only accept cash. Angela did not have any money in the bank, so she took a cash advance from her credit card to pay for the dress, which was $500. She filed bankruptcy ten days later. The presumption of fraud does not arise, because the cash advance was less than $950; however, the creditor can still file a nondischargeability complaint. The creditor will simply have to prove that Angela intended to defraud.
Example 2. Kate knew she had to file bankruptcy, because she could not handle her debt load. However, she wanted to attend her friend's bachelorette party, and she needed money. She withdrew a $600 cash advance from her credit card, figuring she wouldn't have to repay it if she filed bankruptcy. She did file bankruptcy 80 days later without repaying any of the money. Her credit card company can sue her for fraud, and if it can prove she took out the money with no intent to repay and with intent to discharge the debt in bankruptcy, she will not be able to discharge the debt.
Example 3. Anne was in a lot of debt, but she was managing it as best she could, although barely. She hadn't paid her car loan in two months. Her grandmother died, and she needed to buy plane tickets to go to the funeral. She took a cash advance of $1,000 from her credit card to pay for the tickets and for her rental car. When she was paid the following week, she paid $50 towards the debt. Two weeks later, she received a notice that her car was about to be repossessed. Anne quickly filed Chapter 13 bankruptcy to prevent her car from being taken. The credit card company filed a nondischargeability action for the cash advance. Anne may be able to overcome the presumption of fraud by proving that she intended to repay the debt and did not take the cash advance in anticipation of bankruptcy - she made a payment on the debt, and she only filed bankruptcy under threat of repossession.