How long before filing for bankruptcy are you supposed to stop using credit cards?

Question

I recently lost my job and can't pay my outstanding debts, so I'm considering filing for bankruptcy. My problem is that I can hardly cover my daily expenses without using my credit cards. How soon before bankruptcy do I have to stop using my credit cards?

Answer

You'll want to stop credit card use as soon as you realize that you can't pay the bill—and certainly as soon as you decide to file for bankruptcy. But before explaining why, you should know that an exception exists: You can use a credit card for life necessities—food, a winter coat, heating oil or propane, or needed car repairs, for instance—at any time before filing for bankruptcy. However, if you need to rely on this exception, be sure to keep good records of your expenditures in case a creditor questions the purchases.

Now for the general rule.

When you file for Chapter 7 bankruptcy (the chapter usually filed after a job loss), your creditor will examine your recent financial transactions looking for signs of fraud. In this context, fraud means that you ran up bills with no intent to repay them, either because you knew you were going to file for bankruptcy or because you lacked the financial ability to make good on the charges. Here's how it works.

Suppose you run up more than $725 (as of April 1, 2019) to a single creditor for luxury goods or services (not life necessities, as explained above) within 90 days before you file for bankruptcy. Luxury goods—like expensive shoes, video games, or vacations—aren't things you need for everyday life. In that case, the law will automatically presume you had fraudulent intent when making the purchase.

Again, necessary goods and services, such as rent, utilities, and food, aren't included in the presumptive fraud amounts. However, the presumptive fraud rule also applies to cash advances of more than $1,000 from a single creditor (as of April 1, 2019) during the 70 days before filing for bankruptcy.

In either presumptive fraud instance, if the creditor objects and files an adversary proceeding (lawsuit) during your bankruptcy case, you will have to prove that you didn't commit fraud, or the charges will survive your bankruptcy.

Even if your actions don't fit neatly into either of these categories, a creditor can circumvent the presumptive rule by proving you committed fraud when you made the purchase, regardless of the time period. Here are some of the acts a creditor might present as evidence proving a lack of intent to pay for charged goods or services:

  • running up charges shortly before filing
  • continuing to use the card after receiving past due notices
  • increasing spending in the months before filing
  • continuing to use the card after deciding to file (for example, after meeting with a bankruptcy attorney), or
  • using the card in a way that circumvents the spending limit (for example, by making multiple charges for smaller amounts that don't have to be precleared by the merchant).

If the creditor is successful, you'd remain responsible for the debt. Of course, defending lawsuits is costly, so most debtors agree to repay the debt right away, sometimes at a reduced amount.

Because of these rules, the safest course of action is to avoid luxury charges or cash advances that exceed the limits during the months before filing or as soon as you decide to file for bankruptcy, whichever comes first. Learn more about credit cards in bankruptcy and debts that aren't dischargeable in bankruptcy. Or read more about running up credit cards before filing for bankruptcy.

Updated: October 11, 2021

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