Updated: March 28, 2019
Loading up your credit cards just before you file for bankruptcy might be something you live to regret. Debts from purchases and cash advances taken just before filing for bankruptcy aren’t always discharged, or extinguished, by the bankruptcy.
Be assured that certain purchases are on your creditor’s radar, including 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.
If you purchase items on credit knowing that you won’t pay the bill, it’s considered fraud. Debts obtained through fraud are not dischargeable in bankruptcy. There are different types of fraud in bankruptcy, and what the creditor must prove is easier depending on the circumstances.
When these purchases aren’t for luxury items or were made more than 90 days before the bankruptcy filing, the creditor has to prove to the court that the purchaser didn’t intend to pay at the time the purchase was made. This is an onerous 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.
Even so, the inability to pay is considered a hallmark of fraud. When coupled with other evidence, such as meeting with a bankruptcy attorney, a case can build fast.
However, when the purchases are for luxury items, and the charge occurred within 90 days before filing for bankruptcy, the law presumes that you made these charges fraudulently. It is much harder to discharge these types of debts. The same holds for cash advances taken within 70 days of a bankruptcy filing.
For more general information on credit card debt in bankruptcy see Credit Card Debt in Bankruptcy.
The presumptive fraud rule prevents a debtor from discharging credit card purchases from one creditor for luxury items made within 90 days of a bankruptcy filing if the total amount of those charges is greater than $725. (This figure is accurate for cases filed between April 1, 2019, and March 31, 2022.)
Any lavish purchases made on credit during the 90 days before the bankruptcy filing are presumed to be fraudulent. The creditor doesn’t have to present evidence to the court that there was no intent to pay at the time that the purchases were made to prove fraud. As long as the debtor made the purchases in the 90-day period, the creditor need only file an adversary proceeding (lawsuit in the bankruptcy court called a complaint to determine dischargeability).
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.
In bankruptcy law, luxury items are any goods or services that aren’t 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’s 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.
If you take out cash advances that total more than $1,000 within 70 days of filing for bankruptcy, the amount isn’t dischargeable in the bankruptcy. (This figure applies to cases filed between April 1, 2019, and March 31, 2022.) To be nondischargeable, the cash advances must:
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.
When a presumption of fraud arises, you can present evidence that you intended to repay the debt. Typically, you’d use one of the common bankruptcy fraud defenses.
This may be difficult, and you’ll 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 isn’t 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. This is why not having the ability to pay at the time of purchase is strong evidence of fraud.