A few months ago, I wrote about seven things you shouldn’t do if you are considering bankruptcy. This post expands on one of them, using credit cards.
In bankruptcy, the general rule is that debts are discharged while liens remain intact. Section 523 of the Bankruptcy Code lays out exceptions to this rule. Section 523(a)(2) tells us that a debt incurred fraudulently is nondischargeable and will still be owed after the bankruptcy case is closed. Other than cases of identity theft, where one uses someone else’s name to buy goods on credit, how can credit card debts be fraudulent?
The short answer is that using a credit card without intending to repay the debt is fraudulent. Because people don’t state, “I’m not going to pay this bill!” when swiping their credit cards, courts must look at the surrounding circumstances to determine if a particular debtor used his credit card fraudulently. Here are a few facts a court will consider if a creditor accuses a debtor of fraudulent credit card use:
1 – Using the card after talking to a bankruptcy attorney. Consider this scenario: Debtor meets with her attorney on Friday. On Saturday, she goes to an electronics retailer and uses her credit card to buy a new TV, a Blu-ray player, and an Xbox 360. On Monday, she files for bankruptcy protection. Could she really keep a straight face when telling the judge that she intended to repay those Saturday charges?
2 – Using the card to purchase luxury items. The Bankruptcy Code presumes that charges totaling over $600 for luxury goods or services made within 90 days of the bankruptcy filing are nondischargeable. Defining “luxury goods” is more art than science, but the determination will be made using a reasonableness standard (i.e. if the purchases were reasonably necessary living expenses).
3 – Failing to make any payments on the card after making purchases. If the debtor made purchases without making any payments on the account, the court could infer the debtor never intended to repay the debt. On the other hand, if the debtor made monthly payments for a few months after his last purchase, it would appear that he was making his best effort to repay the debt.
Before you get to the point where you are relying on credit cards to pay for food, clothing, and rent, speak to a bankruptcy attorney. If you decide to file bankruptcy, you’ll want to make sure your pre-filing credit card use doesn’t prevent you from getting the discharge you deserve.
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