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Can You Run Up Your Credit Card Debt Before Filing for Bankruptcy?

March 28, 2022

Running up your credit card debt when you’re planning to file for bankruptcy is almost always a mistake and, often, is also fraud. If you do so and then file immediately, that is clear evidence of an intent to defraud your creditors. If the creditor objects based on that fraud, the court may not discharge that debt.

Fraudulent Intent Not Always Necessary

Even if you didn’t intend to defraud your creditors, you could still get in trouble for some charges too near your bankruptcy filing. For example, special rules cover purchases for luxury goods or services or if you took out cash advances within a few months of your filing:

  • Using a credit card within 90 days of filing for luxury goods or services worth more than $725 is presumed fraud.

  • Cash advances within 70 days before filing totaling more than $1,000 is presumed fraud.

If you made these purchases or took these advances, the burden will be on your to show that you did intend to repay the debt or that you didn’t intend to file bankruptcy. It’s even better if you can demonstrate both.

What Is Bankruptcy Fraud?

Bankruptcy recognizes two kinds of fraud:

  • Actual fraud This fraud occurs when you use your credit card intending to defraud the credit card company. In other words, you intentionally ran up the balance as high as you could, knowing that you would file bankruptcy and never pay the bill. The creditor must present evidence of your intent to prevent a discharge.

  • Constructive fraud – Constructive fraud doesn’t require that you intend to run up and not pay a debt. As noted above, the court will consider spending or withdrawing cash in certain amounts close to your bankruptcy filing to be constructive fraud. The creditor can sue to prevent your discharge, and the court may grant judgment to that effect.

What Are Luxury Goods?

Luxury goods are those that aren’t reasonably necessary to maintain your home or your employment. This distinction is important because purchases of necessary goods (and probably cash advances to purchase necessary goods) are dischargeable. Things like utility bills, rent or mortgage payments, school shoes, and food are necessary goods.

Spending to Avoid Before Filing for Bankruptcy

Some kinds of spending will attract unwelcome attention from your trustee and the court – and likely from your creditors. You should avoid these transactions if at all possible.

  • Using credit cards – Don’t run up a big balance; doing so can appear fraudulent. If your balance is big enough, the credit card company may decide to challenge your discharge.

  • Making big purchases – Your trustee can sell your nonexempt goods to help generate funds to pay your creditors. If you buy several large, expensive items right before filing, you will likely lose those items to your trustee.

  • Paying off debts to related or interested parties – Don’t settle your debts with friends or loved ones right before bankruptcy. This preferential payment of debts can be revoked, and the money is brought back into the estate.

A skilled bankruptcy attorney can help you navigate this spending minefield while staying out of trouble. Contact AKS Law today or call 314-740-2989 for bankruptcy assistance.