Credit Cards and Bankruptcy

  • Credit Card debt

Should I Stop Using Credit Cards if I Aim to File For Bankruptcy?

Many people who are struggling with financial issues often consider bankruptcy as the means of getting out of a tough financial spot. However, if you wish to file for bankruptcy, it is important that you keep certain important things in mind as certain actions will be under scrutiny when you file for bankruptcy. Using credit cards, for example, is one such activity which might put you in a bad light when you file for bankruptcy (in either chapter). In fact, it may even have criminal consequences and may cause the judge to refute your claims for bankruptcy.

Lawyers at Los Angeles based law firm Recovery Law Group have seen many examples of people who have gone through tough times, surviving thanks to the credit cards. There is no denying that credit cards help you run the show in tough financial times. However, the usage of credit cards also ensures that you are forever in debt. The vicious cycle of never-ending dues can aggravate your already bad financial condition. Though it is not always necessary that using a credit card (to make debt payments etc.) will have a negative impact, using it should be used in a limited manner or completely avoided if possible especially if you are planning to file for bankruptcy.

Credit Cards and Bankruptcy

Most of the time, bankruptcy lawyers suggest that credit card activity should be kept at a minimum, especially if you plan to use bankruptcy as a means of getting out of the financial mess. This is due to the following factors:

  • Transactions are under observation – On filing for bankruptcy, a court-appointed bankruptcy trustee reviews your financial record. All recent transactions, including those on your credit card, are under scrutiny to assess how much debt you have incurred on them; also what purchases were made using them and which payments were made using them. If any of them are non-essential, luxury items, chances are that this will have a negative impact on your bankruptcy proceedings.
  • Fraud allegations – Going on a spending spree just prior to filing for bankruptcy is reviewed as a fraud. Since trustees will review your financial records, they will be able to spot credit card transactions including any excessive charges. In case, they are genuine (medical bills, taxes, ) you do not have to worry. But if they are for extravagant goods and luxury services, it might be inferred that you were trying to defraud the credit card company by running up a high bill which you never had any intention of paying. Since an individual is contemplating bankruptcy due to persistent financial problems, running up credit card bills may cause fraud allegation, which may result in federal charges for bankruptcy fraud and even prison sentence.
  • Bankruptcy eligibility –In case the bankruptcy trustee or the creditor’s questions your credit card usage, your bankruptcy filing might be affected. If those suspicions are found true, you will be charged with fraud and your bankruptcy case will be thrown out. The onus of proving that those charges do not amount to fraud is a long and tedious task which is completely avoidable.
  • Federal laws – Federal laws are pretty strict about the way they treat excessive credit card usage just before filing for bankruptcy. According to the guidelines, running up the credit card bills for above $675 within 3 months of filing on luxury items and services is considered of dubious intent. Similarly taking a cash advance of $950, 70 days prior to filing for bankruptcy is also considered fraud.
  • No discharge – Sometimes, if creditors find any recent transactions objectionable, they can petition to the court to prevent discharge of the unsecured credit card debt. This is a very big possibility if excessive spending has been done a couple of months prior to filing for bankruptcy.

Since using credit cards incessantly and indiscriminately can have negative implications on your bankruptcy filing; it is better to either avoid using them or using them minimally. Though the situation may seem extremely stressful, it is better to consult bankruptcy lawyers for proper guidance on this issue, especially if you are considering a bankruptcy filing.