Bankruptcy and Recent Credit Card Use
Recent credit card use can be a problem when you are considering bankruptcy. Unsecured creditors like credit card lenders have several options when it comes to objecting to your bankruptcy and they will do so if they believe they can convince your judge that you have abused the process. Here is what you need to know:
Credit Card “Binge” Debt
Not surprisingly, you cannot “binge” on credit cards before filing bankruptcy. Big ticket purchases like electronics, vacations, even furniture and home improvement purchases, will draw scrutiny. It has been our experience that any “big ticket” purchase totaling more than $10,000 to any one creditor within one year prior to filing can be a problem.
Credit Card Purchases With No “Reasonable Expectation of an Ability to Repay”
If you are not making enough money to pay your regular household expenses, and you use your credit cards to pay for regular, everyday bills, an objecting credit card lender could argue that you have been using your credit cards when there is no reasonable expectation that you can repay those bills. We generally see these objections when someone has been using their credit cards to pay budget items for the past 6 months or longer.
Luxury Good or Services Purchases Totaling More than $500 to a Particular Creditor Within 90 Days of Filing
Any credit card purchase that is not for “support and maintenance,” i.e. food. clothing, shelter, other necessities is presumed non-dischargeable. We generally advise our clients to hold off filing until at least 3 months has elapsed since their last use of credit cards.
What Legal Options are Available to Creditors?
If a credit card lender flags your account for possible action, they will generally write us (the lawyer) first to demand a settlement. For example if your total outstanding balance is $15,000, and you have incurred $5,000 in charges over the past 4 months, the lender may demand $7,500. We may counter at $2,000 and settle for $3,000, payable at $250 per month, no interest, over the next year.
If settlement cannot be reached, the lender can file an objection to discharge of a debt under Section 523 of the Bankruptcy Code. If successful, that particular creditor’s claim will survive the bankruptcy but the debts of other, non-objecting creditors will be discharged.
The problem with Section 523 litigation, of course, is that you probably do not have several thousand dollars to engage in non-dischargeability litigation. Creditors know this, of course, but they also know that bankruptcy judges will not allow creditors to squeeze debtors using the litigation process unless the debtor’s conduct has truly been egregious.
The “nuclear option” available to creditors involves objection to discharge under Section 727(a) of the Bankruptcy Code. A Section 727(a) complaint asserts that the debtor has acted fraudulently to such a degree that his entire bankruptcy discharge should be denied.
Unlike litigation to determine the dischargeability of a particular debt under Section 523, Section 727(a) complaints cannot be settled because conduct that would support a 727 complaint is so bad that the bankruptcy itself should be denied.
Our experience has been that only a very, very small percentage of Chapter 7 cases draw an objection to dischargeability of a debt and even fewer draw a Section 727 action. Obviously the best course of action regarding credit card debt issues is to prevent them from occurring, so if you think that bankruptcy might be in your future, you should discontinue or at least minimize your credit card use now.
