Filing for bankruptcy is often a last resort for those overwhelmed by debt. While bankruptcy can offer a fresh start, the period leading up to the filing is critical. Many individuals wonder whether using credit cards before filing could have legal or financial consequences, and this question becomes even more important when considering potential accusations of fraud. In this column, we will explore whether it’s advisable to use credit cards before declaring bankruptcy and the potential risks involved.
Using Credit Cards Before Bankruptcy: Is It Allowed?
Technically, there is no law that outright forbids using credit cards before filing for bankruptcy. However, the real concern lies in how the court or creditors might perceive these transactions. Bankruptcy courts closely scrutinize credit card usage in the months leading up to a bankruptcy filing, especially for luxury purchases or significant cash advances. Certain types of spending could raise red flags and lead to the assumption that you are attempting to discharge debts that were incurred without the intent to repay them, which is considered fraudulent behavior.
When Credit Card Usage Could Be Considered Fraudulent
In general, courts evaluate the timing and nature of the purchases. Here are a few scenarios where using your credit cards right before bankruptcy could cause trouble:
- Luxury Purchases: If you bought high-end items like electronics, vacations, or jewelry within 90 days of filing for bankruptcy, the creditor may argue that you never intended to pay for these purchases, and the court could decide that these debts are non-dischargeable.
- Cash Advances: Taking out a cash advance of more than $1,000 within 70 days before filing for bankruptcy may also be viewed as an attempt to manipulate the system. This is often flagged because cash advances are seen as high-risk borrowing, especially right before bankruptcy.
In these instances, the creditor can object to the discharge of those specific debts, and if successful, you could still be liable for repaying them even after the bankruptcy process is completed. It’s important to note that just because a purchase or advance falls within these timeframes does not guarantee a finding of fraud, but it does create a presumption of fraud, which you would need to rebut in court.
What Types of Credit Card Charges Are More Acceptable?
Necessary and reasonable expenses are less likely to be questioned. For example:
- Basic living necessities, like groceries, medical bills, or utility payments, are typically not scrutinized.
- Household maintenance and car repairs can also be considered legitimate expenses, especially if these are vital to your daily life.
The courts understand that people facing financial difficulties may still need to rely on credit for essential expenses. However, it’s critical to ensure that you’re not making any purchases that can be perceived as frivolous or unnecessary, as these could potentially backfire during the bankruptcy proceedings.
Potential Consequences of Misusing Credit Cards Pre-Bankruptcy
If a creditor successfully proves that you used credit irresponsibly before filing for bankruptcy, several consequences could follow:
- Non-dischargeable debts: The court may decide that specific debts incurred within the restricted timeframes cannot be wiped out, meaning you would still be responsible for paying them.
- Dismissal of your case: In more serious situations, where there’s evidence of intentional fraud, your entire bankruptcy case could be dismissed.
- Denial of future filings: If fraud is proven, you could also be barred from refiling for bankruptcy in the future, limiting your options for debt relief.
Best Practices Before Filing for Bankruptcy
If you are considering filing for bankruptcy and have been using credit cards, there are some steps you can take to avoid these pitfalls:
- Stop using credit cards immediately: The safest option is to halt all non-essential credit card spending as soon as you begin to consider bankruptcy.
- Document all necessary purchases: Keep records of any recent credit card usage, especially if the charges were for essential living expenses.
- Consult a bankruptcy attorney: It’s always a good idea to discuss your situation with an experienced bankruptcy attorney, who can guide you through the process and help you avoid common mistakes that could jeopardize your case.
Conclusion
While it may be tempting to rely on credit cards as you prepare for bankruptcy, doing so without caution can lead to severe consequences, including accusations of fraud. Courts take a close look at credit card usage in the months leading up to a bankruptcy filing, and even well-meaning purchases can be misinterpreted. To avoid complications, it’s important to understand which transactions are considered acceptable and which might be flagged during your bankruptcy case. If you are unsure how your recent credit card usage may impact your bankruptcy filing, consulting with a legal professional can help ensure you’re on the right track.
Disclaimer: This column is for informational purposes only and does not constitute legal advice. For guidance on your specific situation, please contact Song Law Firm at 201-461-0031 or via email at mail@songlawfirm.com.
