Restrictions on Credit Card Debt and Bankruptcy

It seems as if many things in life require a credit card, and the things that do not, can certainly be easier with access to credit. Because of this, many people who need the relief of bankruptcy avoid filing. They may fear not having credit and what that means for their future. In preparation for this, it can be tempting to make purchases on credit or take out a cash advance before filing bankruptcy, but this can come back to bite you. Let me give you some information about the rules related to credit card debt and bankruptcy so that you can make the best possible choices.


Cash Advances and Large Purchases

In a Chapter 7 bankruptcy, unsecured debts, such as credit cards, are discharged completely. Credit cards are considered non-priority debt in a Chapter 13, and many times they are not paid at all. However, if the court believes you’ve used credit with no intention of paying it back, the trustee could put limitations on how this debt is treated.

The court has set some time and dollar amount limits on credit card debt. If you’ve taken out a cash advance of more than $925 within 70 days of filing any chapter of bankruptcy, you will be unable to include that debt in your case. Cash advances of lesser amounts that were taken prior to 70 days of filing may also result in a complaint of nondischargeability from your creditors. For this complaint to be accepted, the creditor would need to prove that you took the advance without a plan to pay it back or in an attempt to defraud them.

Fortunately for debtors, all uses of credit cards right before filing does not necessarily constitute bankruptcy fraud. The court will look at what you purchased, when, and your motivation behind the charges. Using your card to buy luxury items (as defined by the court) within the 90 days prior to filing could be considered fraud. Using your card to purchase necessary items may not be fraud, but it’s likely that the charges will not be included in your bankruptcy. We’ll work together when we file your case to include as much debt as possible.


Paying Other Debts

Bankruptcy can generally not be used to discharge priority debts, such as back taxes, student loans, child support, and alimony. It is fairly common to use credit cards to pay these debts, and that portion of the credit card balance would be nondischargeable and not included in your bankruptcy. If you owe student loans, there is a small chance they may be included in your bankruptcy, but you’d need to demonstrate to the court that the payments cause you “undue hardship.”


Make a New Start

I never advise my clients to rush into bankruptcy without looking at all of their other options, but putting off filing can cause challenges too. The sooner you file, the sooner your debt will be behind you and you can make a new start. If you have questions about how to time your filing, give me a call.