When we meet with clients for the first time, if they are contemplating bankruptcy, we advise them to stop using their credit cards immediately. This is to avoid creditors filing adversary proceedings objecting to the discharge of particular debts. If you incur credit card debt close to the date of the bankruptcy filing, the creditor in question can file an objection with the court, alleging fraud on your behalf. These adversary proceedings will seek to exclude the purchases (i.e. the debt) from the discharge. If the creditor is successful, you will continue to owe the debt after your bankruptcy case is closed, even if you have received a discharge.
While it depends on the specific creditor, any significant credit card use right before a bankruptcy filing may result in an objection to discharge. If you have used your credit cards recently, you should discuss this with your bankruptcy attorney so that you can formulate a strategy. Just because you have used your credit cards recently does not mean that you cannot or should not file a bankruptcy case. As experienced bankruptcy attorneys, we can help you decide the best course of action to resolve your debt problems so that you can begin your journey toward debt freedom.
Credit Card Use in Chapter 7 Bankruptcy Cases
If you have used your credit cards within the past few months, your attorney will review the charges with you and advise you of his opinion as to whether the creditor may pursue an objection to discharge. It is always important to remember that while a creditor may have the option of objecting to discharging a particular debt, it may or may not proceed with an objection. While we cannot guarantee what a creditor may or may not do, we can give you an idea of what we believe may happen based on cases we have handled in the past.
Based on your circumstances, your attorney may advise that you need to stop all credit card use, make the minimum payments for several months, and then file a Chapter 7 bankruptcy case. During your Chapter 7 bankruptcy case, you should refrain from incurring any debt.
You may be able to keep some of your credit cards to use after the bankruptcy case is closed; however, banks will require that you sign a reaffirmation agreement stating that you agree to repay the debt you owe (instead of having it discharged through bankruptcy). Since the purpose of filing a bankruptcy case is to get rid of debt, this decision is typically not in your best interest. After your bankruptcy case is closed, you will be able to rebuild your credit and qualify for a new credit account once you are ready to take that step.
Credit Card Use in Chapter 13 Bankruptcy Cases
Using credit cards prior to filing your Chapter 13 bankruptcy case is also unadvisable. It can potentially affect your bankruptcy plan payment and your overall strategy to get out of debt. However, there may be ways to deal with recent credit card charges through a Chapter 13 case that are not available in a Chapter 7 case. Your bankruptcy attorney can discuss all of your options with you so that you can make an informed decision about what is best for you.
While you are in your Chapter 13 case, you are not permitted to incur any debt without first obtaining permission from the bankruptcy court. This includes the use of credit cards, financing another vehicle or refinancing your mortgage. Your attorney must file a motion with the court and a hearing must be held before you can incur debt. However, because new debt may affect your ability to pay your Chapter 13 plan payment, the court does not approve motions to incur debt, except in certain circumstances.
How To Avoid Using Credit Cards Prior To Filing Bankruptcy
Planning your expenses for the week and month (i.e. budgeting) can help you avoid incurring debt prior to bankruptcy. By prioritizing your expenses, you can save money. Shelter, food and transportation are generally the top priorities. Make sure that you can pay for these, and then budget the rest of your income for other needs.
Help is There, for Every Step of the Way
Request a free bankruptcy consultation to see how trusted bankruptcy attorneys can help you every step of the way – from before you decide to file bankruptcy and through discharge.