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.
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.
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, you truly intended to pay for the ski boots when you bought them—you might still get in trouble.
Here are the rules:
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.
You need certain things to maintain employment and a household. These things fall into the "necessary" goods and services category. By contrast, luxury goods and services aren't required to work and live. Here are a few examples.
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.
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 the bankruptcy court.
The credit card company must take the action of filing an adversary proceeding asking the court to find the debt nondischargable and hold you responsible for paying it after bankruptcy. If the credit card company does nothing, the bankruptcy court will discharge the charges.
When an ordinary fraud case proceeds to trial, the creditor must prove you intended to defraud the creditor. This is the portion the court will skip if the credit card charges qualify to be presumed fraudulent.
Even if the creditor automatically meets this burden of proof, you won't automatically lose the case. You'll have an opportunity to prove that you didn't attempt to defraud the creditor by providing evidence that you intended to repay the debt or didn't intend to file bankruptcy. Typically, it would be best to show both.
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.
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!
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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 25, 2022