I took a cash advance on my credit card to pay off my student loan. Will bankruptcy get rid of the debt?
In most situations, if you pay off student loans with cash advances
from your credit card, the cash advance debt won't be discharged in
Chapter 7 or Chapter 13 bankruptcy. Here's why.
bankruptcy discharge generally applies to all your credit card debt.
However, in certain circumstances, your credit card company can ask the
bankruptcy court to declare your debt nondischargeable. There are two
main reasons for doing so:
The question at hand has two considerations - cash advances and student loan debt.
you take out a cash advance from your credit card and then file
bankruptcy, you may have to repay the debt. Bankruptcy law provides that
there is a presumption of fraud if you take out cash advances that
total more than $925 within 70 days before filing bankruptcy. If you do
so, your credit card company can file a nondischargeability complaint
and ask the court to make the debt nondischargeable; if the credit card
company wins the lawsuit, you will have to repay the debt. (To learn
more, see Recent Charges for Luxury Goods and Cash Advances Before Bankruptcy.)
if the cash advance was more than 70 days ago, however, the creditor
can still sue you for nondischargeability if it can otherwise prove
fraud. If you take out a cash advance to pay off your student loans and
you do so with intent to discharge the debt in bankruptcy, the credit
card company can sue you regardless of when you did it. (To learn more,
see Complaints for Nondischargeability in Bankruptcy.)
the fraud issue, you cannot incur dischargeable debt to repay
nondischargeable debt. Student loans are generally not dischargeable in
bankruptcy. To discharge student loans, you must show extreme hardship,
and the standard for a student loan hardship discharge is very high.
(For details, see Student Loan Debt in Bankruptcy.)
a credit card (credit card debt is usually dischargeable) to repay a
student loan (which is nondischargeable) is not permitted under the
bankruptcy law. Even if the credit card company cannot show that you
committed fraud, it can still sue for nondischargeability on the basis
that you incurred the debt in order to pay off nondischargeable debt.
The only way to prevail in the lawsuit would be to show that you could
have discharged the student loans in your bankruptcy.
Example 1. Joe
has $30,000 in student loans. He's tired of them looming over his head,
so he takes out $30,000 cash from his credit card, deposits it in his
bank account and pays off the student loan. He then loses his job, and
three months later, he files bankruptcy. Joe is capable of working, and
he's hoping to find another job soon. His credit card company can sue
him to make the $30,000 debt nondischargeable. Even though he made the
cash advance more than 70 days before he filed bankruptcy, he used the
credit cards to pay off nondischargeable debt. Joe does not have the
hardship necessary to discharge student loans, so the court will likely
find against him.
Example 2. Allen has $25,000 in
student loans. He takes a cash advance from his credit card and pays
off the debt, because he hates having student loans. Two months later,
Allen is in a horrific car crash that requires both his legs to be
amputated and gives him chronic migraine headaches. Unable to work in
his condition, Allen files bankruptcy. If the credit card company sues
for nondischargeability, Allen has a chance, because he may be able to
show that he was eligible to discharge the student loans because he had
no real ability to repay them after his accident.
To learn more about creditors' lawsuits challenging the dischargeability of debts in bankruptcy, see Adversary Proceedings in Bankruptcy.
by: Rebecca K. McDowell, Contributing Author