Can I Run Up my Credit Card Balances Before I File Bankruptcy?

Although erasing credit card debt in bankruptcy is a primary reason people file, intentionally running up credit card debt before bankruptcy is a bad idea. This article explains why you don't want to max out credit cards before bankruptcy, including the risks of remaining responsible for fraudulent charges, the legal shortcuts creditors can use to prove fraud (including updated dollar amounts for luxury purchases and cash advances), and how to defend yourself if sued. It also includes additional bankruptcy topics that can help you take control of your financial future.

Maxing Out Credit Cards Before Bankruptcy: The Risk of Fraudulent Intent

Filing for bankruptcy is a powerful tool that wipes out qualifying debt, regardless of the amount. If the debt is dischargeable, you can erase it in bankruptcy, and your responsibility to pay it disappears. So if you have credit card debt, you're in luck. Credit card balances are one of the debts most frequently erased with a bankruptcy discharge.

However, the system is designed to provide a fresh start to honest debtors, not to reward debtors who intentionally drive up accounts they plan to erase in bankruptcy. A creditor who can prove a debtor had "fraudulent intent" when making such purchases can strike back and, if successful, collect the debt after bankruptcy.

Did you know? If you paid your income taxes with your credit card, you won't be able to discharge the debt in Chapter 7 bankruptcy. However, the same debt is dischargeable in Chapter 13. The takeaway here? Bankruptcy rules aren't consistent, so choose the chapter carefully, and always do your research.

What Is "Fraudulent Intent" in Bankruptcy?

You would have fraudulent intent if you made purchases on your credit card with no intention of paying the bill. And, as with other forms of bankruptcy fraud, if you rack up credit card debt with fraudulent intent, you should assume the bankruptcy court won't discharge it.

How a Creditor Proves Fraudulent Intent

If a creditor can prove you acted with fraudulent intent, the bankruptcy judge will rule that the debt is "nondischargeable," meaning you will still owe it after your bankruptcy is complete. Although proving fraudulent intent can be challenging, there are two ways a creditor can do it.

Actual Intent

The more difficult approach involves proving "actual fraudulent intent." Actual intent requires the creditor to present evidence proving that you didn't intend to repay the debt when you made the purchase. Not only can this be hard to prove, but it can be expensive. In simple cases worth relatively minor amounts, the costs of the attorney time needed to conduct discovery alone could surpass the amount the creditor seeks to recover.

Presumption of Fraud

The easier, more straightforward method allowed in bankruptcy is a legal shortcut known as the "presumption of fraud." Under this approach, fraud is assumed automatically in some instances. When triggered, the burden of proof switches from the creditor to you, the debtor, to prove the charges weren't fraudulent. Creditors prefer this approach because it requires far less work from them, making it cheaper.

Presumption of Fraud Rules

The presumption of fraud rules make it easy for creditors to force you to reimburse them for luxury charges and cash advances made before bankruptcy, even if you didn't intend to defraud anyone. For example, suppose you bought new pickleball equipment shortly before bankruptcy, fully intending to pay for it. You could still get in trouble. Here's why.

Creditors can apply the presumption of fraud rules in two circumstances: when the debtor makes luxury purchases or takes out cash advances. In these two situations, the bankruptcy court will automatically find fraud if the transactions meet two additional parameters—time and amount.

• Luxury purchases. The presumption of fraud applies if, within the 90 days before bankruptcy, you charged luxury goods and services totaling more than $900 from a single creditor.
• Cash advances. The presumption of fraud applies if, within 70 days before filing bankruptcy, you took cash advances of more than $1,250 from a single creditor.

If the charges occurred outside of these specific timeframes, the credit card company must use the higher standard of actual fraud.

It's important to note that the presumption of fraud dollar amounts are set by law and adjusted periodically. The figures provided are current for cases filed between April 1, 2025, and March 31, 2028. (11 U.S.C. § 523(a)(2)(C)(i).)

Learn more about using credit cards for luxury purchases and cash advances before bankruptcy.

Charges That Don't Violate Presumption of Fraud Rules

Not all prebankruptcy charges are nondischargeable fraudulent debts. Purchasing something you or your family needs on credit isn't a dishonest act and still qualifies for a bankruptcy discharge.

Luxury goods and services. Generally, luxury goods are items or services that are not essential for your basic needs or the needs of your dependents. You don't need them to work and live. Examples include:

• golf clubs
• a gaming console
• designer heels
• concert tickets
• vacations, and
• fancy restaurant meals.

Necessary goods and services. These are purchases for basic needs to maintain employment and a household. Examples include:

• groceries and basic household supplies
• electricity, gas, water, and other utilities
• basic, unbranded clothing
• medical expenses and prescription medications, and
• gasoline, public transit fares, and other transportation costs.

If you're unsure whether something is a luxury good, it's best to err on the side of caution and not purchase it. The court will look at your circumstances, but the best bet is to avoid nonessential spending before filing.

Important Tip. Expect creditors to evaluate everything purchased before filing for bankruptcy and be ready to demonstrate that the charges were indeed necessary. If you need to buy something on credit before bankruptcy, a bankruptcy lawyer will be in the best position to advise you on how to proceed.

When You Might Learn of the Fraud Allegation

If your purchases fall into the luxury category or you took out cash advances shortly before filing, expect the creditor to take action. In some cases, you might discover a creditor is considering objecting to your discharge on fraud grounds when you attend the meeting of creditors or "341 meeting." This is the hearing all individual filers must attend.

At the meeting, the trustee will ask you questions about your financial situation. Creditors also have the right to appear for questioning. It wouldn't be unusual for a creditor to ask about your prebankruptcy finances and spending and whether you'd be willing to repay the debt voluntarily. If you don't agree to, the creditor's only option would be to file a bankruptcy lawsuit called an "adversary proceeding."

Caution. The trustee has an interest in exploring a creditor's fraud allegations because they can lead to facts that help the trustee reclaim assets for creditors. If the case is severe, the trustee might take steps to have the case dismissed or refer it to the Federal Bureau of Investigation (FBI).

Why Creditors File Adversary Proceedings

A creditor holding a substantial debt that believes it can win a presumptive or actual fraud case will likely take action. If a credit card company wants the bankruptcy court to declare your recent charges fraudulent, and therefore a "nondischargeable" debt you can't wipe out, it must file a lawsuit in bankruptcy court, objecting to your discharge in an adversary proceeding.

If the credit card company doesn't file an adversary proceeding, the charges will be discharged or erased in the normal course, along with all other debt qualifying for a discharge. You won't owe anything on the discharged debts after your bankruptcy case.

Impact of Bankruptcy Chapter on Challenged Debts

A creditor can raise the issue of fraud in both Chapters 7 and 13. You'll remain responsible for the debt if the creditor wins, but the payment timeline will differ slightly. Here's what you can expect.

• Chapter 7 bankruptcy. A Chapter 7 filer remains responsible for paying the debt after bankruptcy if the debt is declared nondischargeable by the court. Once the automatic stay lifts, the creditor can resume collection efforts.
• Chapter 13 bankruptcy. You'll pay at least some portion of the debt through the three- or five-year Chapter 13 plan, and any amount remaining after the plan ends will be your responsibility to pay. The creditor will be able to resume collection efforts.

How a Credit Card Company Tries to Prove Fraud

In an adversary proceeding, the bankruptcy court will consider evidence that you did or did not intend to commit fraud when making the purchase. You can expect the creditor to present proof of your financial situation and spending patterns, and whether you planned to file for bankruptcy.

Speaking with a bankruptcy lawyer before making the purchase matters because it's a clear sign that you knew you couldn't pay. Also, the court would likely assume your lawyer explained the presumptive fraud rules. So, steering clear of credit card use for anything other than necessities after meeting with a bankruptcy lawyer is a prudent course of action. Find out more about proving bankruptcy fraud.

Defending Against a Fraud Adversary Proceeding

Even if the creditor presents evidence of fraud or gets to rely on the presumptive fraud rule, you won't automatically lose the case. You can present evidence to prove that you didn't attempt to defraud the creditor.

A typical defense would include presenting evidence that:

• You could pay the charge. For example, you expected a large tax refund, a bonus, or a significant payment that fell through.
• You intended to repay it. This could be difficult to prove, but consistent payments on the card up until a sudden, unforeseen financial crisis could support this.
• You weren't planning to file for bankruptcy. You'd show that you weren't bankrupt when you made the purchase, but only later filed after suffering a job loss, medical emergency, divorce, or similar event.

Ultimately, you'd want to present as much evidence as possible to counter the creditor's claims.

Remember: Don't "Work the System"

It's not unusual to want to run up credit card debt before filing for bankruptcy—most people would love the opportunity to buy things they don't need to pay for. However, you don't want to act on the impulse because manipulating the bankruptcy system is never advisable.

Engaging in dishonest or misleading actions can lead to serious consequences, including the denial of your bankruptcy discharge altogether—and the bankruptcy court and trustees know what to look for and how to identify attempts to take unfair advantage of the process.

Some of the other common fraudulent tactics you'll want to steer clear of include:

• Concealing assets. Don't attempt to hide property or money from the bankruptcy court and creditors. Disclose everything you own.
• Transferring assets. Another strategy to avoid is giving away assets to friends or family members or selling them for less than they're worth, which would be considered a fraudulent transfer.
• Providing false information. You're required to be transparent and forthright on your bankruptcy forms and when questioned. Don't intentionally misrepresent your financial situation.

It's best to approach bankruptcy with honesty and transparency and to be satisfied with the significant savings that come with a debt discharge. Whatever else you could gain isn't worth risking your discharge or incurring fines and criminal charges.

Learn more about the consequences of bankruptcy fraud.

Ready to Learn More? Essential Bankruptcy Topics to Explore

Filing for bankruptcy can be an overwhelming experience, and educating yourself is a great way to regain a sense of control. Now that you understand the pitfalls of prebankruptcy spending, you're ready to explore other topics that will help you make informed decisions about your financial future. The following roadmap should help.

• Which type of bankruptcy is right for you? Understanding the difference between Chapter 7 and Chapter 13 is fundamental. Learn about the eligibility requirements and how each type could impact your assets and debts in Chapter 7 vs. Chapter 13 Bankruptcy.
• What debts can you get rid of? Not all debts are treated equally in bankruptcy. It's crucial to know which debts are dischargeable and which will stick around after your case is concluded. Learn more about debts that can and can't be discharged.
• Navigating the bankruptcy process. From filling out the paperwork to attending the meeting of creditors, the bankruptcy process has several steps. Familiarizing yourself with the steps involved in bankruptcy will help reduce anxiety and ensure you're prepared.
• What property can you keep? The thought of losing your possessions can be scary. Discover how bankruptcy exemptions work and what assets are typically protected by understanding the differences between exempt and nonexempt Assets.
• Handling secured debts (like your home or car). If you have a mortgage or car loan, you'll need to understand how secured debts are treated in bankruptcy and what your options are for keeping or surrendering collateral. Begin by understanding how bankruptcy affects your house, and then learn what's required to keep a car in bankruptcy.
• Are there other ways to deal with debt? You have options other than bankruptcy available to you. For instance, consider whether debt negotiation, debt consolidation, or another alternative to bankruptcy would better fit your situation.

You can take control of your financial future. Keep learning, stay informed, and remember that relief is possible.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? We wholeheartedly encourage research and learning, and you can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. These resources can explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Additionally, information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.