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

Even though erasing credit card debt in bankruptcy is one of the primary reasons people choose to file, purposely running up credit card debt before filing for bankruptcy is a bad idea. Here's why.

A bankruptcy discharge wipes out all credit card debt at the end of the case. It doesn't matter if the debt is $1,000 or $100,000. Your responsibility to pay the outstanding balance will be gone (although you might have to return jewelry, electronics, or furniture if you agreed the purchase would secure payment of the debt).

However, a significant exception exists. If you rack up credit card debt with fraudulent intent, you should assume the bankruptcy court won't discharge it in bankruptcy. Charging on your credit card with no intention of paying the debt, especially when planning to file for bankruptcy, is almost always considered fraud.

Can I Use My Credit Card If I'm Planning to File for Bankruptcy?

You'd be wise to avoid running up credit card balances before filing if you'd like your bankruptcy case to go smoothly. Charging purchases shortly before a bankruptcy case is one of the red flags your creditors and the bankruptcy trustee appointed to your case will be looking for. It's one of the more common inappropriate acts people tend to engage in before filing.

If you run up credit card balances before bankruptcy, the credit card company can file a lawsuit asking the bankruptcy court to declare the debt "nondischargeable." If the credit card company wins, you'll remain responsible for paying your credit card bill after your case ends.

Learn about "adversary proceeding" lawsuits in bankruptcy.

Why Can't I Charge Luxury Goods or Take Out Cash Advances Before Bankruptcy?

Bankruptcy laws make it easy for creditors to force you to reimburse them for luxury charges and cash advances made before bankruptcy. Even when you run up credit card balances without intending to defraud the creditor, for example, if you truly intended to pay for the ski boots when you bought them, you might still get in trouble.

Here are the rules:

• Suppose you use your credit cards within 90 days before bankruptcy for luxury goods and services totaling more than $800. In that case, the bankruptcy court would presume you committed fraud (figures apply to cases filed between April 1, 2022, and March 31, 2025). (11 U.S.C. § 523(a)(2)(C)(i)(l).)
• The bankruptcy court will also presume fraud if you take cash advances of more than $1,100 within 70 days before filing bankruptcy (amounts apply to cases filed between April 1, 2022, and March 31, 2025). (11 U.S.C. § 523(a)(2)(C)(i)(l).)

But an exception exists. You can charge purchases for necessary goods and services. When you use a credit card to buy something you or your family needs, the credit purchase still qualifies for a bankruptcy discharge.

How Are Luxury and Necessary Purchases Different?

You need certain things to maintain employment and a household. These things fall into the "necessary" goods and services category. By contrast, you don't need luxury goods and services to work and live. Here are a few examples of both.

Necessary goods and services. Charges for heat during the winter and gasoline to get to work should be dischargeable because they're necessary items. Also, the court would likely consider unbranded athletic shoes for a child's physical education class an essential expense.

Luxury goods and services. The court would likely consider an expensive pair of branded athletic shoes or designer heels an unnecessary luxury purchase. Luxury services would include charges for manicures and nonmedical relaxation massages.

Read more about luxury purchases made just before bankruptcy.

What Happens When Credit Card Purchases Are Presumed Fraudulent?

If your purchases fall into the luxury category or you took out cash advances shortly before filing, expect the creditor to take action. Many will appear at the 341 meeting of creditors, the one appearance all bankruptcy filers must attend, and ask you to repay the debt voluntarily.

If you don't agree to reimburse the creditor for the credit card charges, the creditor will file an adversary proceeding in bankruptcy court.

Credit Card Companies Must Challenge the Debt Discharge

If a credit card company wants the bankruptcy court to declare your recent charges nondischargeable so you can't wipe them out, it must take action. The credit card company must file a lawsuit in bankruptcy court and object to your discharge in what's known as an "adversary proceeding."

The credit card company can win the adversary proceeding in one of two ways depending on when you made the purchase. Remember, the 90-day presumptive period refers to the 90 days immediately before the bankruptcy filing.

• Charges made before the 90-day presumptive period. The credit card company will have to prove fraud. You'll be able to present a defense.
• Charges made during the 90-day presumptive period. The credit card company can skip the step of proving you committed fraud because fraud will be presumed. Instead, you must prove that the charges weren't fraudulent. Switching who must prove fraud makes the credit card company's job much easier.

The bankruptcy court will discharge the credit card charges if the credit card company doesn't file an adversary proceeding. Learn more about adversary proceedings and fraud consequences in bankruptcy.

How a Credit Card Company Proves Fraud in an Adversary Proceeding

You can expect the bankruptcy court to look at whether you were broke when you made the purchase and if you intended to repay it. The court will also consider whether you consulted with a bankruptcy lawyer and if you did, when the meeting occurred.

Why would it matter that you'd spoken with a lawyer?

It's a clear sign that you knew you couldn't pay. Also, the court would likely assume the lawyer explained the 90-day presumptive fraud rule. So it would be a good idea to steer clear of using your charge cards for anything other than necessities after meeting with a bankruptcy lawyer.

Defending Against an 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 prove that you didn't attempt to defraud the creditor.

A typical defense would include presenting evidence that you could pay the charge, that you intended to repay it, and that you didn't intend to file bankruptcy. Typically, you'd want to present as much evidence as possible.

Keep in mind that trying to "work the system" is never a good idea. Because the bankruptcy court will have seen every type of manipulation possible, the best way to avoid a problem is by following the rules.

Learn more about timing a bankruptcy filing.

Speak With a Bankruptcy Lawyer

Most credit card companies will carefully review all your purchases and other card activity before the bankruptcy filing, so if you have charges you're concerned about, it's a good idea to talk to a bankruptcy lawyer. An attorney can help you decide whether to go forward and pay the charges if the creditor raises the issue or avoid bankruptcy altogether.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure 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!

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 September 29, 2022