Credit cards are a creature of convenience. Unfortunately, they are also a creature that can eat away at your finances if left untamed and can easily force hardworking families into bankruptcy. While many families survive on the short-term credit lines offered by these scavengers immediately prior to filing bankruptcy, section 523 of the Bankruptcy Code provides a mechanism for creditors to object to their debts being discharged in bankruptcy if the debtor charged $500 or more of luxury goods or services within 90 days of filing. The debt is considered fraudulent under the theory that the debtor charged an item on the credit card without an actual intent to repay the charge. If you plan to file either Chapter 7 or Chapter 13 (or an individual Chapter 11) bankruptcy case in the near future, here is a list of actions NOT to take:
1. Do Not Use Credit Cards for 90 Days Prior to Filing.
The best method to ensure that a creditor will not red-flag your account is to simply not use credit cards during the 90 day period preceding your bankruptcy filing date. If you do, please make sure that you are only charging basic household expenses and not jewelry for the girlfriend/wife or Mediterranean Cruises!
2. Do Not Take Cash Advances.
Taking a cash advance from your account within 90 days of filing is a sure-fire way to receive an objection. The bankruptcy code provides that all cash advances for more than $750 within 90 days of filing will be presumed nondischargeable, which means that the debt will survive your bankruptcy, and the credit card company may sue you and garnish your wages despite your bankruptcy filing. Surprising to some, DO NOT transfer balances from one account to another during this time period either. Balance transfers are essentially cash advances, so any amount transferred will be presumed nondischargeable.
3. If you want to keep a credit card, pay down the balance to zero, but before 90 days of filing.
If you file Chapter 7 bankruptcy without paying down the entire balance on your card, the issuer is technically not a creditor and will not have to be listed on the bankruptcy schedules. Be wary of this practice, however, as any charges you make beginning the day of filing will not be wiped out in bankruptcy since the will be post-petition debt. If you must use a credit card post-petition, please only charge budgeted items and basic household expenses. Any only charge what you can afford to pay-off in full at the end of every month.