Avoid the “Presumption of Fraud” for Using Credit Cards before Filing Bankruptcy

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Avoid the “Presumption of Fraud” for Using Credit Cards before Filing Bankruptcy

Using credit card cards when you’re thinking about filing bankruptcy, even to a relatively modest extent, can mean that you will have to pay back the amounts of those purchases if you file a bankruptcy. That could happen even if at the time you made those purchases you fully intended to repay that credit—in other words, even if you weren’t sure if you were going to file a bankruptcy.

The Bankruptcy Code contains some very specific rules about the consequences of using credit to buy “luxury goods or services” during the months before filing a bankruptcy.

If you use a credit card—or any other type of consumer credit—to buy at least $500 of consumer “luxury goods or services” through any single creditor within the 90 days before filing bankruptcy, there is a “presumption” that the debt incurred this way is nondischargeable—that it can’t be legally written off.

Don’t be fooled by the word “luxury” in that rule. That means anything not “reasonably necessary.” Arguably anything not used for survival in not “reasonably necessary.” So even relatively modest purchases could be considered “luxuries for this purpose.

Similar rules apply to the use of cash advances, except that the trigger dollar amount is $750, and the period of time is within 70 days before filing bankruptcy, creating the same “presumption” that the debt would not be dischargeable.

You may be thinking that these rules only create presumptions, which can be defeated. So that you can still discharge these kinds of debts by showing that you in fact you had every intention of paying them at the time you used the credit. Yes, in theory, but not likely in practice. First, coming up with that kind of evidence—proving your intent at some specific point in time– is usually not easy. And second, and more important, the high cost to bring that kind of evidence to court usually makes trying to do so not worthwhile. Usually the amount of attorney fees it costs you to fight the issue is more than the amount being fought about.

So if you use a credit card or other consumer credit exceeding these dollar limits, and then file bankruptcy within the applicable 70-day and 90-day periods, most likely you will still have to pay for whatever credit was incurred during those periods. You can avoid these presumptions by waiting to file the bankruptcy until after those periods of time have expired, but that’s not always possible. At best you’ll delay getting your bankruptcy filed, and so will delay the eventual resolution of your financial problems. Avoid that by avoiding using your credit cards and/or lines of credit whenever there is a chance that you’ll have to file a bankruptcy in the near future.


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