Using Your Credit Cards Before You File For Bankruptcy
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Okay, so let’s be real here. Whenever anyone discusses Chapter 7 Bankruptcy, inevitably, someone thinks, “Oh, I know what these people do. They max out their cards right before they file and then they get to keep all their stuff and get rid of the debt.”
Let’s address these two assumptions separately.
First, almost no one, in my experience, does this. The fact of the matter is that the majority of people who are filing for Chapter 7 Bankruptcy file for specific reasons:
- They can no longer afford to pay for their mortgage and are forced to file Bankruptcy to avoid the monetary penalties associated with foreclosure.
- They earn less than what they need to support their families and they begin to use credit cards as a buffer, helping them pay for essentials such as food and gas. Once they’re unable to pay the minimums, the 30 percent interest rate kicks in, and they have no choice but to file.
- Because either they, or their spouse, have lost their jobs.
- They or someone in the family has had a medical emergency that has resulted in huge medical bills and/or the inability to work and bring home additional money.
That’s it. Despite anecdotes to the contrary, out of the hundreds of bankruptcy cases I’ve filed, I really can’t say I had anyone that was trying to game the system by buying a bunch of stuff and then filing. It just doesn’t make sense.
Now, what’s to stop someone from doing this? In other words: what happens if you decide to max out all of your cards before filing for bankruptcy?
It’s very simple. Those charges are not dischargeable and you are still responsible for them.
Under 11 USC 523 of the Bankruptcy Code, luxury charges of more than $500 within 90 days of filing for bankruptcy are presumed to be non-dischargeable. So, if you think you’re going to be able to go to Best Buy and buy a Samsung a few months prior to filing, you’ll likely be responsible for that Samsung.
“But, Danny, that’s stupid!” you think. “Someone could just wait 91 days and then file and then they’ll be in the clear.”
Not true. The creditors can literally look into the purchase and see whether or not you had the means by which to reasonably pay this debt back. In other words, if you’re spending about $1,000 on your card and out of nowhere, six months prior to your bankruptcy, you’re spending $4,000 on your card, and you can barely make minimum payments, the creditor’s may have an argument that those charges are fraudulent.
Further, they can look to whether or not, at the time, you were planning on filing for bankruptcy in the near future when you made this purchase. And you may have to settle with them, or, worse yet, your entire bankruptcy may be in danger.
This doesn’t mean, by the way, that if your mother is ill and she needs medication that costs $700 and you buy it on your card, that it will be considered a non-dischargeable purchase. Necessities are exempt from this presumption of non-dischargeability. Same thing goes for diapers, food, or if the roof on your house just collapsed. Any good attorney would look at this on a case by case basis.
So the lesson here is this: though some people believe that the bankruptcy system is wide open to abuse, the reality is that the cases of abuse are really the exception to the rule. Most people who file are hardworking individuals that have fallen on some tough times. Further, if you think you’re going to be filing for bankruptcy in the near future, it’s probably not a good idea to start racking up credit card bills. Not only is it dishonest, but it can also mean you’ll be right back in the situation you started out in – only without any relief in sight.
Disclaimer : This post is for general informational purposes only. It doesn’t establish any attorney-client relationship and you should speak with a bankruptcy attorney with any questions you have before filing.
Daniel Gershburg Esq., is a real estate and bankruptcy attorney with offices in Sheepshead Bay and Manhattan. The practice was specifically set up to change the way people view attorneys, by incorporating radical ideas like calling people back quickly, returning emails, giving clients ’round the clock access to their cases and charging low fees. For more information please visit Brooklyn Real Estate Attorney Daniel Gershburg‘s website.