It is recommended to stop using your credit card 90 days before filing for Chapter 7 bankruptcy.
Under the federal bankruptcy system, you can get into trouble if you use your credit card (or pay it off) in a way that creates suspicion, if not a presumption of fraudulent intent.
In this blog post, we consider issues about credit card use leading up to a bankruptcy filing and how they can affect your bankruptcy discharge. In particular, we address whether you should continue using your credit card when considering Chapter 7 bankruptcy and how you should treat your credit card bills leading up to filing bankruptcy.
At Stone Rose Law, our bankruptcy attorneys advise Arizona residents on debt relief matters, including Chapter 7 bankruptcy. If you are considering bankruptcy as a solution to overwhelming debt and want to know how your credit card bills will be treated when you file, call us at (480) 739-2448 or contact us online.
Should You Continue Using Your Credit Cards Before Filing Bankruptcy?
Sometimes, like when you have little or no income coming in and still need to pay essential bills or buy groceries, your credit card may be the only thing standing between you and not being able to pay your utility bills or put food on your table.
Trustees review recent spending for red flags, but creditors are the parties that typically challenge whether specific credit card debts are dischargeable. They are generally disposed to see essential spending patterns more favorably than discretionary ones.
Thus, if you have to rely on your credit card to make ends meet, the court and the trustee are probably going to be less inclined to challenge it.
- Food, groceries, and household necessities
- Utilities, rent, or mortgage payments
- Gas or transportation to work expenses, like mass transit
- Necessary medical bills or prescriptions
Sometimes, even spending on essential items can be called into question if it’s excessive or inconsistent with your past spending habits. For example, if you usually buy chicken and hamburger at the grocery store but suddenly start buying lobster, Wagyu steak, and Gooseneck barnacles, this can be seen as problematic by the trustee.
A rule of thumb in deciding whether an item is essential or discretionary is to ask yourself, “Is this something I really need, or is this a comfort item? Is it an essential, or an indulgence?” The more you stay in the essentials lane, the less likely you are to encounter resistance if you need to file for bankruptcy.
What About Spending on Luxury Purchases?
By comparison, non-essential spending within 90 days of filing for bankruptcy can result in a presumption of fraud. Purchasing luxury goods or services totaling more than $800 within 90 days before filing can be presumed nondischargeable.
Examples of spending that can lead to this kind of fraudulent presumption include:
- Going on vacation
- Spending on entertainment, like going to a concert event
- Spending on consumer electronics, jewelry, or luxury clothing
- Large or unusual purchases are inconsistent with your past spending habits
- Cash advances taken close to filing
What About Taking Out Cash Advances?
Taking out cash advances on your credit card shortly before you file for bankruptcy can cause a problem for you. If you take out such an advance within 70 days before you file, it may be considered fraudulent intent on your part even if you use the cash to pay for ordinary expenses.
Cash advances are among the most common sources of Chapter 7 creditor disputes. Cash advances totaling more than $1,100 within 70 days before filing are presumed nondischargeable. You should carefully consider this before making any such transactions on your credit card.
How Should You Treat Your Credit Card Bills Before Bankruptcy?
Two important advantages of Chapter 7 bankruptcy are the automatic stay and the ability to completely discharge unsecured debt, such as credit card balances. If your credit card issuer has been calling you about a past-due balance, or even threatening to take you to court over it, the automatic stay will put a stop to these activities.
Similarly, if you cannot repay your credit card balances, Chapter 7 will often discharge the balance you owe and give you a fresh start.
As a general rule, if you can, you should keep making payments on your cards until you are sure you will file for bankruptcy. If you stop making payments and choose not to file for bankruptcy protection, this can further damage your credit, put you further behind, and leave you open to collection efforts.
If, however, you are certain that you will be filing for bankruptcy, then stopping payments on your credit card will not be a significant issue, because you will be seeking to discharge your accumulated debt in any event.
Another consideration when paying your credit card balance is that you should be careful about trying to pay off your cards before filing your bankruptcy petition. This is because if you make a large payment to one creditor within 90 days of filing while leaving others unpaid, the bankruptcy trustee might consider it a preferential payment.
If your credit card company concludes that your use of your credit card was made with fraudulent intent, it can challenge the discharge ability of the debt. This is especially true if your disputed spending falls within the 90-day window for the presumptive fraud rule, or within the 70-day window for cash advances. In these situations, you will carry the burden of proving that the charges or cash advances are not fraudulent.
Do You Have Questions About Credit Cards and Chapter 7 Bankruptcy?
To sum up, here are some key points to remember about potential legal issues when using or paying with your credit card while you are contemplating bankruptcy:
- If you can avoid spending on your credit card within 90 days of filing for bankruptcy, it is best to do so. This will reduce the risk of any transactions being disputed as fraudulent.
- Similarly, try to avoid making any cash advances shortly before filing.
- If you must use your credit card within 90 days of filing for bankruptcy, use it only for essential purchases and be prepared to explain your purchases to the bankruptcy trustee.
- If you have not firmly decided to file for Chapter 7, and can still make credit card payments, it is best to continue doing so.
- If you make payments on your credit card debt and have multiple debts, it is generally not advisable to pay off your card balance to a single creditor before paying your other debts; this can be construed as a preferential payment.
- Once you have committed to file for bankruptcy, it is acceptable to stop paying on your cards.
If you have any questions about credit cards and Chapter 7 bankruptcy, or the bankruptcy process in general, the bankruptcy lawyers at Stone Rose Law are available to answer your questions and to give you legal help if you decide to make use of bankruptcy debt relief.
You can call us at any time, any day, at (480) 739-2448 to set up a free consultation with an Arizona bankruptcy attorney. You can do the same by using our online contact form.
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