Even if you are thinking about filing for bankruptcy, you still might have to use your credit cards to pay for your daily expenses. However, using a credit card right before filing for bankruptcy can be problematic, especially if you buy expensive items or take cash advances.
Filing for bankruptcy will not automatically erase all your credit card charges. Under certain conditions, the creditors can claim that recent debts should not be discharged. If you are considering filing for Chapter 7 or Chapter 13 bankruptcy in Indiana, it is important to understand how these rules work.
Credit card debt is usually dischargeable
Credit card debt is considered unsecured because it is not backed by collateral like a home or car. While Chapter 7 bankruptcy can eliminate a variety of unsecured debts, Chapter 13 bankruptcy lets individuals repay their debts through a payment plan.
A bankruptcy discharge means a person is no longer personally liable for discharged debts, and creditors can no longer pursue collection. There are a number of exceptions to federal bankruptcy laws.
One exception relates to fraudulently obtained debts.
Recent luxury purchases can cause problems
The Bankruptcy Code provides several exceptions to the automatic discharge of unsecured debts, depending on when the person filing for bankruptcy made certain purchases.
According to 11 U.S.C. § 523(a)(2)(C), some consumer debts incurred during the 90 days before filing bankruptcy for luxury goods or services are considered nondischargeable debts. The exclusion concerns goods or services which are reasonably necessary for the maintenance of the debtor or a dependent.
This distinction plays a major role. The purchase of food or the payment of normal household expenses is one thing; the purchase of an expensive holiday or luxury item is another.
Cash advances can also raise red flags
Special considerations apply to cash advances. Under §523, a presumption of nondischargeability exists for certain qualifying cash advances in excess of the statutory limit that have been incurred during the 70 days immediately preceding the filing of the bankruptcy petition.
Even if a transaction falls outside those presumptions, that does not mean a creditor cannot challenge a credit card debt created intentionally and fraudulently. The creditor may sue the borrower under the Bankruptcy Code’s general fraud rules.
For instance, a debtor who realizes bankruptcy is coming soon and spends thousands of dollars on a credit card with no intention of repaying the debt might be challenged by the creditor.
Should you stop using credit cards?
While there is no specific rule that says you can’t use a credit card before filing for bankruptcy, you need to proceed carefully. Spending money on household bills and other necessary expenses is allowed. However, purchasing luxury items or taking out a significant amount of cash will raise eyebrows. An Indiana bankruptcy lawyer can help you determine what you can and cannot do with your credit card before filing for bankruptcy.
Talk to a Danville, IN, Bankruptcy Lawyer Today
Chris Arrington represents the interests of Indiana residents who need to file for bankruptcy. Call our office today to schedule an appointment, and we can begin discussing your next steps right away.