Can I Use My Credit Cards Before Filing Chapter 7?

When individuals face overwhelming financial difficulties, they may consider Chapter 7 bankruptcy as a path toward a fresh start. This legal process aims to discharge eligible debts, offering relief from financial obligations. Specific rules govern the use of credit cards in the period leading up to a bankruptcy filing. Understanding these regulations is important to navigate the process effectively.

Understanding Chapter 7 Debt Discharge

Chapter 7 bankruptcy helps individuals eliminate certain unsecured debts, like credit card balances and medical bills. Its primary goal is to provide a financial fresh start by discharging qualifying debts. A discharge legally releases the debtor from personal liability for most debts, preventing creditors from taking further collection actions.

Not all debts are eligible for discharge. Certain obligations, such as most taxes, child support, and student loans, are not dischargeable. A debtor’s actions before filing can affect whether certain debts, particularly those incurred on credit cards, will be discharged. The bankruptcy system provides relief for honest debtors, not for intentional debt accumulation.

Rules Governing Pre-Bankruptcy Credit Card Use

Bankruptcy law addresses debt incurred shortly before a filing, especially credit card use. These provisions prevent individuals from intentionally running up balances with no intent to repay. A “presumption of fraud” can arise for certain transactions, making it easier for creditors to argue a debt should not be discharged.

One presumption applies to luxury goods or services purchased with credit cards. If an individual incurs consumer debts to a single creditor totaling over $800 for luxury items within 90 days before filing, these debts are presumed non-dischargeable. Luxury goods or services are those not reasonably necessary for the debtor’s or their dependents’ support or maintenance.

A similar presumption applies to cash advances. If an individual takes cash advances totaling over $1,100 from a single creditor within 70 days prior to filing, these amounts are also presumed non-dischargeable. These specific monetary thresholds and look-back periods are established under the Bankruptcy Code to identify transactions that may indicate an intent to defraud creditors.

These are legal presumptions, meaning the burden shifts to the debtor to demonstrate they did not intend to defraud the creditor. Even if transactions fall outside these categories or timeframes, creditors may still challenge the dischargeability of other credit card debts if they can present evidence of actual fraud or a deliberate intent to deceive.

Consequences of Non-Dischargeable Debts

If a bankruptcy court determines that specific credit card debts incurred before filing are non-dischargeable, the debtor remains legally obligated to repay those particular debts. This means that even after the Chapter 7 bankruptcy case concludes and other eligible debts are discharged, the non-dischargeable amounts persist. Creditors can then pursue collection efforts for these specific debts, which may include lawsuits or other collection actions.

Such a determination often results from an “adversary proceeding,” which is essentially a lawsuit filed within the bankruptcy court by the creditor. The creditor initiates this proceeding to ask the court to declare their claim non-dischargeable, arguing that the debt was incurred fraudulently or falls under one of the specific exceptions. The complaint for non-dischargeability must be filed within 60 days after the first meeting of creditors.

Should the court rule in favor of the creditor in an adversary proceeding, the debtor will be responsible for repaying the non-dischargeable debt. This outcome undermines the fresh start that bankruptcy is intended to provide for those particular obligations. Defending against such a proceeding can also involve additional legal expenses for the debtor, even if they ultimately prevail.

Financial Management Before Filing

Individuals contemplating Chapter 7 bankruptcy should meticulously manage their finances to avoid potential complications. Once the decision to file is made or seriously considered, it is generally advisable to cease using credit cards entirely. Continuing to incur new debt, especially for non-essential items, can raise concerns about intent and potentially jeopardize the discharge of those obligations.

It is prudent to transition to using cash or debit cards for essential living expenses only, such as food, utilities, and rent. This approach helps to demonstrate responsible financial behavior and avoids creating new debts that could be challenged in bankruptcy court. Focusing on necessary expenditures aligns with the bankruptcy system’s purpose of providing relief to those facing genuine financial hardship.

Consulting with a qualified bankruptcy attorney at the earliest stages of considering bankruptcy is a critical step. An attorney can provide tailored guidance on managing finances, explain the specific look-back periods and monetary thresholds, and advise on potential risks associated with pre-filing transactions. Their expertise helps individuals navigate the complexities of bankruptcy law and make informed decisions to secure the most favorable outcome.