Some Do's and Don'ts While Preparing for Bankruptcy

If you are preparing to file for bankruptcy and have used credit cards recently, you may be concerned about being accused of fraud by a credit card company.

The Bankruptcy Code states:

[11 USC §523(a)(2)(C)(i)(I),

(I) consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable.
(II) cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable.

Most people who file for bankruptcy do not wake up one morning and decide "Oh I think I'll file bankruptcy today". For most people, the decision is made after a long drawn out process that takes place over many months and sometimes years. When it comes to credit cards, it often involves using credit cards to bridge the monthly budget gap and moving money around from credit card to credit card via convenience checks and balance transfers (convenience checks and balance transfers are conisered cash advances).

Challenges to purchases and cash advances by credit card companies are rare unless they are glaringly obvious as fraudulent or unless they are in an amount which makes it worthwhile for them to pursue a lawsuit.

If you have made some large purchases, transfers or advances recently and want to play it safe:

  1. Make sure you pay at least pay 2-3 minimum monthly payments. This will show at least to some degree that you intended to pay your bills when you made the purchase, transfer or advance.
  2. If you have transferred a balance or used a convenience check to transfer a balance of more than $7,000 you probably will want to make at least 6 minumum payments and wait a year before you file.

It most likely is going to take something around the $7,000 range or more for it to be worthwhile for a credit card company to dispute a transaction(s). Keep in mind, the credit card company can only dispute the portion of the total balance which it believes is fraudulent. If the judge rules in their favor only that portion won't be able to be discharged through bankruptcy.

If the credit card company decides to take action they must file a lawsuit called an Adversary proceeding. A judge will hear the case and make a ruling.

Keep in mind, you will be under oath at your 341 meeting and even if none of your creditors show up at the meeting, you still could be asked specific questions about specific credit card transactions by the Trustee. It is best to stop using credit cards immediately after you have made the decision to file for bankruptcy. Using credit cards with no intention of paying them off is by definition, fraud. Look at the big picture of your bankruptcy and the fresh, debt free start it will provide. You have other things to focus on such as saving up to purchase a house or perhaps you'll need to rent after bankruptcy. So keep it simple and play it safe with your credit card usage. You will eliminate a lot of stress during your bankruptcy and make it more likely your bankruptcy will be fully discharged without incident.

Good Luck.