Can I Use my Credit Cards Prior to Filing for Bankruptcy?

You might have to pay back charges made before filing for bankruptcy.

Updated March 20, 2019

If you use your credit cards shortly before filing for bankruptcy, your credit card company might have grounds to argue that the recently incurred charges shouldn’t be eliminated by your bankruptcy discharge. Whether a credit card company will ask the court to declare the charges nondischargeable will depend on:

  • when you incurred the new debt
  • what you bought, and
  • the purchase or service amount.

Learn about the types of debt discharged in Chapter 7 bankruptcy.

Fraudulent Debts Aren’t Dischargeable in Bankruptcy

If a credit card company wants to have your debt declared nondischargeable, it must file a complaint (called an adversary proceeding) with the court. But it will need grounds for the suit.

In most cases, the credit card company will rely on the legal basis that you can’t use bankruptcy to eliminate debts obtained through fraud, misrepresentation, or false pretenses. The credit card company will need to prove that you had no intention of paying back the debt when you incurred the new charges.

As a practical matter, this can be difficult to prove in bankruptcy court, but not impossible. For instance, showing that you didn’t have the funds to pay for the purchase when you made it is considered a badge, or hallmark, of fraud. Having met with a bankruptcy attorney about filing a bankruptcy case before making the purchase is another.

However, in some instances, the mere act is enough to establish fraud. Specifically, purchasing luxury items on credit or taking out cash advances immediately before filing for bankruptcy is presumed fraudulent and the debt isn’t nondischargeable (more below).

Learn more in Why a Creditor May File an Objection to Discharge in Bankruptcy.

Luxury Items Purchased on Credit Within 90 Days of Bankruptcy

If you use your credit card to purchase expensive luxury items shortly before filing for bankruptcy, you can expect the credit card company to contest the discharge of the debt in bankruptcy court. Incurring more than $725 of total debt from a single creditor for the purchase of luxury goods or services within the 90 days preceding your bankruptcy filing is presumed to be fraudulent and the debt is nondischargeable (as of April 1, 2019; $675 for cases filed between April 1, 2016, and March 31, 2019). (11 U.S.C. § 523(a)(2)(C)(i)(l).)

The credit card company will have to file an adversary proceeding (lawsuit); however, since the debt is presumed fraudulent and nondischargeable, it won’t have the burden of proving fraud. Instead, you’ll have to rebut the presumption of fraud by proving to the court that you didn’t commit fraud and that the debt should be discharged.

From a practical standpoint, it’s common for debtors in this situation to avoid litigation by agreeing to remain responsible for paying the debt after bankruptcy. Because the flat fee paid to a bankruptcy attorney to prepare the bankruptcy petition rarely includes litigation costs, it’s often cheaper to settle than to pay an attorney to defend the action.

What Are Luxury Goods and Services?

Luxury goods and services are things that aren’t reasonably necessary to support you and your dependents. For example, if you charge an expensive vacation to your credit card just before filing for bankruptcy, it will likely be considered a luxury item.

By contrast, a court is unlikely to find utility bills, food, rent, and modestly-priced clothing to be luxury purchases.

Cash Advances Obtained Within 70 Days of Bankruptcy

If you take out a cash advance before filing your case, you risk not being able to discharge that debt in your bankruptcy. Cash advances totaling over $1,000 in aggregate obtained during the 70 days before a bankruptcy filing are also presumed nondischargeable (as of April 1, 2019; $950 for cases filed between April 1, 2016, and March 31, 2019).

Find out about other types of bankruptcy fraud.

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