Regarding Use of Credit Prior to Filing Bankruptcy

This is a common issue that arises subsequent to one's decision to file for bankruptcy.  Is it proper to continue to use credit cards knowing that you will be filing bankruptcy?  There are three specific exceptions to discharge found in the Bankruptcy Code which can make a portion of a debt owed non-dischargeable by virtue of having been incurred just prior to filing.

The first provision excepts from discharge debts owed to a single creditor totaling more than $500.00 for the purchase of luxury goods or services within 90 days of the filing of bankruptcy.  Keep in mind that this is not limited to indiviudal purchases but rather an aggregate amount.  Whether or not a purchase is deemed a luxury good is up for interpretation, but the line can usually be drawn fairly easily.  For example, if a creditor could prove that the debtor had purchased  a handbag for $750.00 and files for bankruptcy 2 months later, the creditor may object to the discharge to the extent of that amount.  On the other hand, a debtor may have to spend $600.00 on necessary auto repairs and not be subject to this exception.  But, the latter example may be subject to the next exception.

Another way a portion of a debt can be excepted from discharge is if the creditor can prove that the debtor had no intention of repaying the debt at the time the debt was incurred.  Using the auto repair example, if the debtor had already decided to file for bankruptcy prior to having the vehicle repaired, the creditor could make a case that the debt is non-dischargeable.  Certainly the creditor could argue circumstantially that the debtor had no intention of repaying the debt, considering it was incurred just prior to filing, but some other proof is most likely necessary.  Thus, creditors rarely pursue such an objection unless they have solid evidence of fraud.

Finally, a creditor may seek to except from discharge cash advances that aggregate more than $750.00 incurred within 70 days of the filing of bankruptcy.  Thus, if a debtor withdraws $1,000.00 in cash from an ATM using a credit card just one month prior to filing, the creditor may object to the discharge.

One more thing to mention is that a debt only becomes non-dischargeable is if the creditor to whom the money is owed actually objects to the discharge by way of an adversary complaint, AND prevails in that suit.  Often enough, debtors can avoid non-dischargeability complaints and obtain a full discharge, despite actually running afoul of these three exceptions, simply because the creditor failed to object or had no knowledge of the characterization of the debt at the time (creditors must file objections to dischargeability within 60 days from the date first set for the 341 meeting of creditors; late objections will not be considered).

In sum, if an individual has entertained the idea of filing, or has decided that they will file, use of credit cards should be avoided, especially for such "luxury" goods as stated above.  However, if using a credit card is the difference between eating and starving, or for necessary and reasonable living expenses, opt to use it.  If the creditor seeks to except from discharge a portion a of a debt and prevails, the debtor would only be liable for the non-dischargeable amount, not the entire debt.