The most common reason individuals file Chapter 7 bankruptcy is to get rid of unsecured debt, such as credit card debt and medical bills. For the most part, credit card debt is eliminated in bankruptcy. However, there are certain circumstances in which credit card debt is not dischargeable.
When Credit Card Debt Is Dischargeable
The bankruptcy code does not provide a specific list of debts which are dischargeable; instead it lists what constitutes a non-dischargeable debt. When it comes to credit card debt, unless it fits in one the following categories, it is dischargeable in Chapter 7 bankruptcy.
When Credit Card Debt Is Not Discharged
The following categories of credit card debt won't be discharged in Chapter 7 bankruptcy.
If you run up more than $650 or more to a single creditor for the purchase of luxury goods or services within 90 days of filing bankruptcy, the law presumes that your intent was fraudulent, and therefore the debt won't be dischargeable. For example, if you use your credit card to go on a cruise and file bankruptcy the following month, if the total amount charged was more than $650, it may not be discharged in the bankruptcy.
Cash advances on credit cards totaling more than $925 incurred within 70 days of filing bankruptcy are also presumed to be incurred with a fraudulent intent, and are most likely not dischargeable. As with the luxury goods rule, this is an attempt to discourage insolvent people from incurring additional debt just to have it forgiven in bankruptcy.
Debts Incurred Through Fraud
Any debt resulting from credit extended due to fraud, materially false statements, or false representation is non-dischargeable. This not only applies to credit cards but all types of debt in bankruptcy. More and more, credit card issuers are challenging the dischargeability of credit card debt due to fraud. Here are some things courts will look at in determining if the debt was incurred through fraud.
- Timing. Large charges incurred shortly before filing for bankruptcy might indicate an intent to defraud creditors. Similarly, shopping sprees prior to bankrupty that are not consistent with your usual spending patterns won't look good in the eyes of the judge.
- Racking up credit card charges after consulting with an attorney. This makes it look like you ran up your debt knowing you'd soon be filing for bankruptcy.
- Large charges. Charges for luxury items or in large amounts might make the court suspect you incurred the charges knowing you would never pay them back.
- Misuse of the card. If you keep using your card after the issuer ordered you to return the card, or after you've gotten several "past due" notices might raise some red flags.
- Charging items when you knew you couldn't make payments. Courts will frown upon charges made when you were clearly insolvent. The credit card issuer will be likely to argue you were insolvent if there's a note in your file that you met with an attorney or it notes an increase in spending followed by 60-90 days of inactivity.
What to Do if the Creditor Challenges Dischargeability
Just because the credit card issuer challenges the dischargeability of your credit card debt doesn't mean you are on the hook for the debt. If you disagree with the card issuer's assessment of the debt, be prepared to litigate the issue in bankruptcy court. Doing so if often complicated, and you may want to consult with an attorney. If you decide to litigate it alone, get a good self-help manual, like Represent Yourself in Court, by Paul Bergman and Sara Berman (Nolo).