When to Stop Using Credit Cards Before Filing Chapter 13?

Chapter 13 bankruptcy offers individuals with a steady income a structured path to reorganize debts under court protection. Debtors repay a portion of what they owe over three to five years, retaining assets. Understanding how credit card use impacts a Chapter 13 filing is important, as certain financial behaviors before filing can complicate the process and affect debt dischargeability. This article clarifies credit card use considerations for Chapter 13 bankruptcy.

Understanding Key Concepts in Chapter 13 Filings

Chapter 13 bankruptcy helps individuals facing financial distress by creating a debt repayment plan. This plan allows debtors to catch up on missed payments and address unsecured debts, providing a fresh financial start through a court-approved structure.

A bankruptcy trustee oversees Chapter 13 proceedings, ensuring the repayment plan is feasible and fair to creditors. The trustee reviews the debtor’s income, expenses, and financial transactions leading up to the filing. This scrutiny prevents abuse of the bankruptcy system and ensures debtors act in good faith.

Recent financial activity, especially new debt, is examined to determine if debts were taken on with no intention of repayment. This ensures individuals do not take advantage of bankruptcy by accumulating charges just before filing. The system relies on debtor transparency and honest financial conduct.

Specific Transaction Scrutiny Periods

Specific rules govern credit card use before a Chapter 13 filing to prevent debtors from incurring unintended debts. These rules involve look-back periods and monetary thresholds that trigger a presumption of non-dischargeability for certain transactions.

One rule pertains to cash advances obtained using a credit card. If a debtor takes cash advances totaling more than $1,000 from any single creditor within 70 days before filing for bankruptcy, these debts are presumed non-dischargeable. This threshold is outlined in 11 U.S.C. § 522 and is currently $1,250 as of April 1, 2025. This includes ATM withdrawals, convenience checks, or other credit-to-cash transactions.

Another area of scrutiny involves purchases of “luxury goods or services.” If a debtor charges luxury goods or services totaling more than $750 from a single creditor within 90 days before filing for bankruptcy, these debts are also presumed non-dischargeable. The threshold for these is $900 as of April 1, 2025. “Luxury goods or services” are broadly interpreted as items not reasonably necessary for the support of the debtor or their dependents.

Examples of luxury items include vacations, high-end electronics not essential for living, designer clothing, expensive jewelry, and recreational vehicles. Basic groceries, necessary clothing, medical services, or essential car repairs are typically not considered luxury items. These rules discourage debtors from making extravagant purchases on credit with the expectation of discharging them through bankruptcy.

Implications of Problematic Credit Card Use

When a debtor’s credit card activity falls within specified scrutiny periods and exceeds monetary thresholds, a “presumption of fraud or abuse” arises. This means the debt incurred is assumed fraudulent. The burden then shifts to the debtor to demonstrate the debt was not incurred with intent to defraud or abuse the bankruptcy system.

The specific debt incurred during the problematic period may be deemed non-dischargeable. The debtor would remain personally liable for that debt, even after the Chapter 13 repayment plan is completed and other dischargeable debts are eliminated. Creditors may file an “adversary proceeding” to object to the discharge of these specific debts.

If the court upholds the presumption of fraud and the debtor cannot rebut it, the debt will not be included in the Chapter 13 discharge. This can lead to continued financial obligations, potentially undermining the fresh start bankruptcy aims to provide. The bankruptcy trustee or other creditors may also scrutinize the petition more closely, potentially delaying the process.

A debtor can rebut this presumption by presenting evidence they intended to repay the debt when incurred, or that purchases were necessary. Demonstrating a legitimate, unavoidable need for the expense or a change in financial circumstances after the transaction can be part of this rebuttal. The process is fact-specific and typically requires legal expertise.

Prudent Financial Actions Before Filing

Once an individual contemplates filing for Chapter 13 bankruptcy, taking immediate financial steps is advisable. Stop using all credit cards, particularly for non-essential purchases. Continuing to use credit cards, especially for cash advances or luxury items, can create complications and jeopardize the bankruptcy filing.

Avoiding new debt entirely is crucial. This includes refraining from new loans, lines of credit, or significant purchases on existing credit accounts. Any new debt incurred shortly before filing will be subject to scrutiny and could be challenged by creditors or the bankruptcy trustee.

Gather and organize all financial records, including statements for credit cards, bank accounts, and investment accounts. Having these records readily available will streamline bankruptcy petition preparation and provide transparency to your legal counsel and the court. Accurate documentation is essential for a smooth bankruptcy process.

Seeking legal advice from a qualified bankruptcy attorney as early as possible is important. An experienced attorney can review financial circumstances, advise on filing timing, and provide tailored guidance on credit card use. They can help identify potential issues, such as transactions that might trigger a presumption of fraud, and strategize how to address them.

Maintain complete honesty and transparency with your attorney about all financial transactions. Withholding information can have severe consequences, including dismissal of the bankruptcy case or denial of discharge for certain debts. A clear and open line of communication with legal counsel ensures the best possible outcome for the Chapter 13 filing.