When to stop using credit cards before filing Chapter 7

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Written by Attorney Jenni Klock Morel.  
Updated June 22, 2020

Summary

Once you know that you’re going to file bankruptcy, it’s time to stop using your credit cards. Ideally, you stop making new charges a few months before filing. However, that isn’t always possible. If you’ve recently made new charges and you’re close to your Chapter 7 bankruptcy filing date, take a look at those charges to determine if they were for necessities only. The most important thing is that you don’t make any charges with the intention of erasing those debts through bankruptcy.

Once you know that you’re going to file bankruptcy, it’s time to stop using your credit cards. Ideally, you stop making new charges a few months before filing. However, that isn’t always possible. If you’ve recently made new charges and you’re close to your Chapter 7 bankruptcy filing date, take a look at those charges to determine if they were for necessities only. The most important thing is that you don’t make any charges with the intention of erasing those debts through bankruptcy.

Don’t incur debts intending to discharge them in bankruptcy

Debts incurred with the intent to discharge them in bankruptcy are non-dischargeable. Credit card debts are unsecured debts not backed by collateral and are generally dischargeable in a bankruptcy case. But you shouldn’t max out your credit cards before filing just because you’re about to file. New credit card debt incurred while planning to erase those debts by filing for bankruptcy can’t be discharged. 

Debts incurred for luxury goods or services purchased in the 90 days before filing are presumed non-dischargeable. A creditor can file an adversary proceeding (a lawsuit within the bankruptcy case) objecting to the discharge of these debts. The creditor need only show that more than $725.00 for luxury items was charged during the 90 day lookback period. The creditor doesn’t have to prove that the filer didn’t intend to pay back the credit card charges when they were made. The burden is on the bankruptcy filer to prove to the bankruptcy court that the charges were reasonably necessary for maintenance and support and weren’t incurred with the intent to discharge them by filing bankruptcy.

Avoid cash advances

A cash advance is a short-term loan that usually comes with a high interest rate. Cash advances come in different forms. A cash advance can be taken against the available balance on a credit card.

Cash advances totaling more than $1,000.00 to any single creditor within 70 days of filing for bankruptcy are presumed to be non-dischargeable. This bankruptcy law doesn’t consider how the cash was spent. The luxury item determination applies only to credit card charges.

Cash advances are unsecured debts and when taken out beyond the look-back period can be discharged in bankruptcy. However, even older cash advance debt from before the 70 day presumption period may be found non-dischargeable. This can happen if a creditor objects to discharge alleging that you didn’t intend to pay the debt back regardless of when it was incurred. The bottom line is that cash advances can cause complications in a bankruptcy case and it’s best to avoid them if possible.

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How credit cards are treated in a typical Chapter 7 bankruptcy

A bankruptcy trustee is appointed to administer a Chapter 7 bankruptcy filing. One of the trustee’s duties is to take from the filer any nonexempt assets that can’t be protected through bankruptcy and sell them. The trustee uses the proceeds to pay the creditors a portion of what they’re owed. First to be paid are priority claims, including certain tax obligations and back domestic support obligations. Last to be paid are nonpriority, unsecured debts, including credit card balances and medical bills.

In a Chapter 7 bankruptcy case, the credit card companies and other unsecured creditors only receive payment from the bankruptcy trustee if there are nonexempt assets and even then, they only get a pro-rata share, and only if there are no priority claims. More than 90% of individual Chapter 7 cases are no asset cases, meaning there aren’t any nonexempt assets to be sold and the creditors get nothing. 

Creditors can and will object to the discharge

Considering that unsecured creditors usually get nothing in a Chapter 7 bankruptcy case, it makes sense that credit card lenders routinely check the charging habits a person had in the months and weeks leading up to a filing. When a credit card company finds new debt charged just before filing for bankruptcy and the total debt charged in the last 90 days is large, they will very likely object to the discharge.   

After one of your creditors files such an objection, then you’ll have the opportunity to defend the dischargeability of your debt by first filing an answer to your creditor’s allegations and later at a hearing. You have the ability to hire legal representation during any of these proceedings if you don’t want to go it alone. If you’re successful and the court denies your creditor’s objection to discharge, then that debt will be included in your bankruptcy discharge. If you’re not successful, then the debt will be non-dischargeable and you’ll have to pay it back after your bankruptcy case.

What if I can’t afford not to use my credit cards and stay current with minimum payments?

Once you know that filing bankruptcy is the debt relief path you’ll take, it’s okay to stop making minimum credit card payments if doing so means you can afford necessities. Yes, this will ding your credit score, but you can begin rebuilding that after your discharge is entered. It’s better to prioritize your needs for food, shelter, transportation, etc. over your desire to maintain your credit score. Having a few missed payments on your credit report from the months before filing your bankruptcy case is better than not being able to discharge your full debt.

Past due payments and filing bankruptcy will appear on your credit report and affect your credit score. Once your unsecured debts are erased by bankruptcy, then your debt to income ratio is more favorable. After discharge, you’re not carrying a large debt load and lenders know you can’t file for Chapter 7 bankruptcy again until 8 years have passed, so in some ways, you become a more desirable candidate for loans and lines of credit than before bankruptcy.   

When you stop making minimum payments on your credit card bills, your creditors will start trying to collect from you. They’ll usually start with letters and frequent collection phone calls. As soon as you file your bankruptcy petition, the automatic stay takes effect and all collection activity against you must stop. 

Credit cards are usually shut down after missed payments. You won’t be able to make new charges on closed credit cards. These accounts were going to be closed when you filed for bankruptcy. You can continue to use your debit card before you file bankruptcy because it’s linked to a bank account with funds on hand and doesn’t create a debt obligation. 

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Conclusion

It’s time to stop using your credit cards once you know that you’re going to file Chapter 7 bankruptcy and at least 90 days before filing, if possible. You can’t max out credit cards before bankruptcy just because you’re about to file. Debts incurred with the intent to erase them in bankruptcy are non-dischargeable. Bankruptcy provides relief for the honest but unfortunate debtor. 

Upsolve can help if you’re looking to find a credit counseling agency to help you look into debt relief options, find a bankruptcy attorney, or explore filing bankruptcy on your own using our free web app for eligible filers. Discover the best debt relief option for you to get the fresh start that you need.

Upsolve is a nonprofit that provides a free self-service software tool for low-income Americans filing Chapter 7 bankruptcy without an attorney.

About the author

Attorney Jenni Klock Morel
Jenni Klock Morel is a writer, nonprofit leader, and Social Justice Law Scholar. For years she practiced consumer bankruptcy law exclusively as a debtor's attorney, helping individuals and families file for Chapter 7 or 13 bankruptcy protection. Jenni left the practice of law to... read more

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