Before filing for bankruptcy, you should avoid using your credit card for anything other than necessities, so maxing out your credit limit is generally ill-advised. You should especially avoid making purchases for what could be considered a luxury item or taking out cash advances. Such debt may otherwise be nondischargeable.
It’s understandable why someone might think running up a credit card bill would be a good idea. The rationale behind this thought is that if debts are going to be discharged anyway, it might seem advantageous to take advantage of available credit. However, this strategy can lead to complications and potential legal issues.
Running Up Debt Before Bankruptcy May Be Considered Fraud
Maxing out credit cards before filing for bankruptcy can be seen as fraudulent behavior. Bankruptcy courts carefully review recent financial activities to determine whether a debtor has acted in bad faith.
Making significant charges or cash advances shortly before filing can be construed as an intent to defraud creditors. This perception can lead to the dismissal of your bankruptcy case, meaning you will remain responsible for all your debts. You can also face criminal charges for bankruptcy fraud.
Limits on Purchases Before Filing for Bankruptcy
Under bankruptcy law, certain debts are considered nondischargeable if incurred under suspicious circumstances.
For example, luxury purchases over $800 within 90 days of filing for bankruptcy are presumed to be nondischargeable. Cash advances over $1,000 taken within 70 days of filing are also presumed nondischargeable. These rules prevent people from exploiting the bankruptcy process by incurring debt they do not intend to repay.
What Is Considered a Necessary Purchase?
You can use your credit cards before filing for bankruptcy when making necessary purchases for things like food, basic clothing, rent, utilities, and other expenses like these. If holding back from making a purchase would adversely impact your family’s health or safety, there’s a good chance it may be considered a necessary expense.
If you are unsure about using your credit card before filing for bankruptcy, the best thing to do is to refrain from doing so until you’ve consulted with an experienced bankruptcy lawyer who can provide personalized advice on this issue.
Creditors Can Challenge a Discharge
Creditors have the right to challenge the discharge of specific debts in court. If they can prove that you incurred debt with no intention of repayment, they can request that the court exclude these debts from your bankruptcy discharge. This could leave you with substantial financial obligations even after bankruptcy.
Potential Financial Consequences
The financial consequences of maxing out credit cards before bankruptcy can be severe. High balances on credit cards mean higher minimum payments, which can strain your finances further. If your bankruptcy case is dismissed due to fraudulent activity, you will still be responsible for these payments, which can be overwhelming.
Maxing out credit cards can also result in higher interest rates and additional fees, compounding your financial difficulties. Credit card companies often increase interest rates for maxed-out cards, making it even harder to pay down the balance. This can lead to a cycle of debt that is difficult to break, ultimately worsening your financial situation.
Additionally, having maxed-out credit cards can negatively impact your credit score. A lower credit score can make it more challenging to secure loans, rent an apartment, or even get a job in some cases. The long-term effects of poor credit can follow you for years, making financial recovery more difficult.
Contact Us for a Free Consultation
We at Nguyen Law Group understand that bankruptcy is an information-dense topic that can be difficult to sort through when you’re already under a lot of financial pressure. Our goal is to help you understand how bankruptcy works and provide you with the legal advice and services you need to seek financial freedom.
If you need assistance on any bankruptcy-related matter, contact us today for a free initial consultation.