Typically, you can erase or "discharge" credit card debt in bankruptcy. But not always. If you run up credit card debt while planning to wipe it out in bankruptcy, you might be accused of fraud and have to repay it. The chances of this occurring are high if you charged luxury goods on your credit card shortly before filing for bankruptcy.
In this article, you'll learn the following:
We explain what you must know to avoid problems when erasing credit cards in bankruptcy to help you prevent a credit card creditor from filing a legal action against you.
The straight answer is that you could face a fraud charge if you aren't careful. Credit card fraud occurs when you purchase something on credit, knowing you have no intention to repay the debt or don't have the money to repay it.
Here's what you should know to avoid running into a credit card fraud problem before bankruptcy:
Keep reading for more information.
When you make a credit card purchase, you promise to repay the debt later. Buying an item on credit, knowing you can't or won't pay, is fraud. We explain several types of fraud at the end of the article, but in each case, the underlying concept is the same. However, an exception exists that will allow you to use your credit cards before bankruptcy in certain circumstances.
The easiest way to prevent fraud is to stop using credit cards after visiting a bankruptcy lawyer or deciding to file for bankruptcy. Doing either suggests you can't or don't intend to pay your bills.
However, you can use your credit card before filing for bankruptcy if you have no other way to buy something essential or "goods or services reasonably necessary for the maintenance and support of you and your family."
For instance, if the weather forecasts a deep freeze, you could purchase heating oil for you and your family. A warm jacket and boots for a school-age child and a repair on the car used for work would also be allowed.
No. By definition, luxury purchases aren't essential for your well-being. If your creditor sues you in bankruptcy and wins, you won't be able to discharge the debt in bankruptcy. You'd remain responsible for the charges.
It can be. Suppose you charge luxury purchases totaling $800 or more within 90 days of filing for bankruptcy. In that case, the creditor wouldn't need to prove you intended to commit fraud, the bankruptcy court would presume it. You'd have to prove you intended to pay the bill or the purchase was reasonably necessary to avoid a fraud charge.
Creditors receive the same advantage when a bankruptcy filer takes cash advances totaling $1,100 within 70 days of bankruptcy. (The amounts apply to cases filed between April 1, 2022, and March 31, 2025.)
Any goods or services not reasonably necessary for the maintenance and support of you and your family would be a luxury purchase. For instance, fur coats, jewelry, home decor, golf clubs, and salon services would likely be considered luxury purchases under bankruptcy law.
Example 1. 45 days before filing for Chapter 7, Xavier bought a $5,000 engagement ring on his credit card, and the credit card company sued for nondischargeability. The bankruptcy court determined the engagement ring was a luxury item purchased within 90 days of filing for bankruptcy and presumed fraud. Because Xavier couldn't prove the purchase was necessary or that he intended to repay the debt, the bankruptcy court declared the debt nondischargeable. Xavier remained obligated for the credit card charge.
Example 2. One day, Jasmin's car breaks down. Because she has a meager income, she can't afford to pay $900 to replace the transmission. However, she needs the car to go to work, so she uses her credit card to pay for the repair. A court would likely find that this was a reasonably necessary expense and allow the discharge of the credit card debt.
The credit card company brings the fraud to the bankruptcy court's attention by filing an "adversary proceeding." An adversary proceeding asks the court to hold a trial to determine whether fraud occurred.
It depends. If the bankruptcy court finds a debt fraudulent, the court will declare it "nondischargeable." You'd have to pay it after your case ended.
However, the bankruptcy court can't make a debt nondischargeable if the creditor doesn't file an adversary proceeding. The bankruptcy court would erase the credit card charges with other dischargeable debts.
Learn about other types of debts that are not dischargeable in bankruptcy.
A bankruptcy creditor can sue under a fraud theory for various reasons, including if you charge goods or services without intending to pay the bill. The charges don't need to be for luxury goods and services, and they can occur at any particular time (other than those imposed by the statute of limitations). However, the creditor would need to prove you intended to commit fraud.
By contrast, a creditor who can rely on "presumptive fraud" isn't required to prove intent. Engaging in a particular act is enough to imply or presume fraud. For instance, the bankruptcy court will presume fraud if a debtor uses a credit card to make luxury purchases of $800 or more within 90 days of the bankruptcy filing. The presumption gives a creditor an advantage because proof of intent isn't needed.
Because the burden of proof is eased in a presumptive fraud matter, most cases settle out of court with the debtor agreeing to pay some or all charges. Learn about the consequences of bankruptcy fraud.
Did you know Nolo has made the law easy for over fifty years? It's true—and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 23, 2022