If I run up my credit cards before bankruptcy, can I get rid of the debt and keep what I bought?
If you max out your credit cards right before bankruptcy, the court may not wipe out the debt in your bankruptcy.
Filing bankruptcy can help you get rid of credit card debt; however, if you use your credit cards excessively knowing you intend to file bankruptcy, the credit card company can accuse you of fraud and take steps to make sure you still have to repay the debt.
How Bankruptcy Gets Rid of Credit Card Debt
Most bankruptcy filers can get rid of credit card debt in bankruptcy. In Chapter 13 bankruptcy, you pay off a percentage of your credit card debt through your repayment plan (often the percentage is very low), and then the rest is wiped out at the end of your plan period. In Chapter 7 bankruptcy, your credit card debt is wiped out entirely This is called discharging the debt. To learn more about the bankruptcy discharge and how your debts are treated in bankruptcy, visit the What Happens to Your Debts in Bankruptcy topic page.
Credit card debt is generally dischargeable; however, if the credit card company can prove to the court that you used your credit cards fraudulently, the court can order that the debt not be discharged, and you will have to pay it back.
Maxing Out Your Credit Cards Before Filing Bankruptcy Is Fraud
Every time you use your credit card, you are obtaining credit -- the credit card company lends you money with each swipe. Even when you use your credit card to buy a $2 candy bar, you're being lent money for the purchase of that candy bar. Under federal bankruptcy law, credit obtained by "fraudulent means" can be deemed nondischargeable.
Is running up your credit cards right before you file bankruptcy considered to be "fraudulent means"? Yes, particularly if you do so for the sole purpose of getting what you can out of the credit card before wiping all the debt out in bankruptcy.
As an example, suppose you visit with a bankruptcy attorney and make the decision to file Chapter 7; then, knowing you won't have to pay it back, you go on a spending spree with your Visa card, because you're basically getting it all for free. You get to keep the stuff, but you don't have to pay back the debt because of the bankruptcy. This is obtaining credit by fraudulent means -- when you use your credit card, the credit card company is lending money based upon your promise to repay it, and using it knowing you will not repay it is fraud.
How the Credit Card Company Challenges the Dischargeability of Your Debt
When you file bankruptcy, your credit card company will look at your transaction history to see if you made any large purchases before you filed. If it finds evidence of fraudulent activity, it can file a lawsuit against you in your bankruptcy, called an adversary proceeding, asking the court to make that debt nondischargeable. (To learn about these lawsuits, see Nondischargeability Complaints in Bankruptcy.)
If you don't respond do the lawsuit, the credit card company will obtain a default judgment against you, and the debt will not be discharged. If you do respond to the lawsuit, you will spend likely thousands in legal fees defending it, and despite paying all those legal fees, you might still lose and have to pay back the credit card debt as well.
To learn more about credit card debt and bankruptcy, visit our Credit Cards and Bankruptcy topic page.