Loading up your credit cards just before you file for bankruptcy may be something you live to regret. Debts from purchases and cash advances taken just before filing for bankruptcy may not be "discharged", or wiped out by the bankruptcy. These include amounts owed for luxury goods purchased within 90 days of the bankruptcy, and cash advances taken within 70 days of the bankruptcy. The determination that these debts will survive the bankruptcy is not automatic but the law gives creditors a big advantage in court.
Using Credit Cards With No Intent to Pay - Fraud
If you purchase items on credit with no intent to pay for them, it is considered fraud. Debts obtained through fraud are not dischargeable in bankruptcy. When these purchases are not for luxury items or were made more than 90 days before the bankruptcy filing, the creditor has to prove to the court that there was no intent to pay at the time the purchase was made. This is a difficult burden of proof because the creditor has to show subjective intent and not just an inability to pay. In other words, it is not enough to show that you used your credit card during bad financial times or that it was unlikely that you would be able to pay. The creditor has to prove to the court that you never intended to pay.
However, when the purchases are for luxury items and are made within 90 days before you file for bankruptcy, the law presumes that you made these charges fraudulently. It is much harder to discharge these types of debts.
For more general information on credit card debt in bankruptcy see our article, Credit Card Debt in Bankruptcy.
Credit Card Charges for Luxury Items
You cannot discharge credit card purchases from one creditor for luxury items made within 90 days of your bankruptcy filing if the total amount of those charges is greater than $650.
Any purchases made on credit during the 90 days before the bankruptcy filing are presumed to be fraudulent. This means that the creditor does not have to prove to the court that there was no intent to pay at the time that the purchases were made to prove that the debt was incurred through fraud. As long as the purchases were made in the 90 day period, the creditor need only file a lawsuit in the bankruptcy court (called a complaint to determine dischargeability) and say they were. While it is technically the creditor's burden to show that the purchases were for luxury items, you are often stuck with the debt unless you can convince the court that the purchases were not for luxury items. If you challenge the creditor’s characterization of a particular charge as a luxury item, the judge will make the determination after a trial on the matter.
What is a Luxury Item?
According to bankruptcy law, luxury items are any goods or services that are not reasonably necessary for the support or maintenance of the debtor or the dependent of the debtor. Past court decisions provide some guidance as to what constitutes a luxury item--but you can’t rely on these entirely because each case is different. Generally, any extravagant, indulgent or nonessential purchase is considered a luxury.
Courts may also look to the circumstances surrounding the purchase to determine if something is a luxury item. The court examines the evidence to see whether the debtors made the purchase with some degree of financial responsibility. Purchases may show financial irresponsibility if the amount spent or the number of items purchased is excessive even though the items generally fall into the reasonable and necessary category. Medical services are a good example. It is unlikely an emergency appendectomy would be considered a luxury purchase. In contrast, it would be difficult to think of cosmetic botox injections as anything but a luxury item.
Examples of luxury purchases. Items that some courts have found to be luxury items include vacation expenses, designer or excessive clothing purchases, expensive cosmetics, a brand new vehicle where the debtor had multiple vehicles, furnishings and household goods to beautify and update the home, jewelry, cologne, coffee maker, a three wheeled recreational vehicle, magazine subscriptions, sporting goods, a computer, candy, oriental rugs, and a camera.
Examples of non-luxury purchases. Items that some courts have found not to be luxury items include legal fees for a divorce proceeding, a moderately priced second automobile for a working spouse, clothing, shoes, cosmetics, gas, groceries, moderately priced furniture to replace broken furniture, and an inexpensive china set.
Recent Cash Advances
If you take out cash advances that total more than $925 within 70 days of filing for bankruptcy, this amount is not dischargeable in the bankruptcy. In order to be nondischargeable, the cash advances must:
- have been for a consumer purpose rather than a business purpose, and
- total more than $925 to any one creditor. (This means that if, for example, you take out cash advances of $500 from two different creditors, the presumption isn’t triggered.).
The type of goods you ultimately purchase with the money from the cash advance doesn’t matter. The luxury item determination only comes into play if you charge goods or services on a credit card.
A Defense to Nondischargeability: Intent to Pay
When a presumption of fraud arises, you can present evidence that you intended to repay the debt. This may be difficult (you will probably need the help of a lawyer) because you must provide supporting evidence that you intended to repay the debt -- merely telling the judge that you planned to repay the debt is not enough. You might succeed, however, if you can show that a major event pushed you into bankruptcy after you made the purchases. Examples might include a catastrophic illness, or the uninsured loss of a necessary vehicle or home.