Running Up Credit Cards Before Filing Bankruptcy: Is it Fraud?

If you max out your credit cards right before bankruptcy, the court might not wipe out the debt.

By , Attorney

Filing for bankruptcy can help you get rid of credit card debt. However, you won't want to use your credit cards knowing you intend to file bankruptcy. The credit card company can file an "adversary proceeding" lawsuit alleging fraud and ask the court to exclude the debt from your discharge.

You can avoid such problems by learning about fraudulent credit card use before bankruptcy and how to prevent presumptive fraud in bankruptcy.



Filing Bankruptcy for Credit Card Debt

Most bankruptcy filers can get rid of or "discharge" credit card debt in bankruptcy. Credit card debt is wiped out in Chapter 7 after about four months. In Chapter 13, you'll pay back a portion of what you owe, but any amount not paid through your repayment plan is erased at the end of the case.

However, if the credit card company can prove that you used your credit cards fraudulently, the court can order the debt not discharged, and you will have to pay it back. So it's essential to know when to stop using credit cards before bankruptcy.

Avoiding Fraud Before Filing Bankruptcy on Credit Card Debt

Every time you use your credit card, you obtain 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 to purchase that candy bar. The bankruptcy court can decide that you must repay a debt after bankruptcy if you incurred it by "fraudulent means." It will be "nondischargeable."

Is running up your credit cards before filing bankruptcy considered "fraudulent means"? It can be if you use the card when you don't intend to repay the debt.

Suppose you visit a bankruptcy attorney and decide to file for Chapter 7. Then you go on a spending spree with your Visa card and purchase items you don't necessarily need with every intent to keep your purchases and wipe out the debt in bankruptcy.

The bankruptcy court would likely find that you charged the items using fraudulent means and, as a result, incurred the debt fraudulently. The credit card company is lending money based on your promise to repay it. Because you have no intent to repay it, and you're buying unnecessary luxury items, it would likely be considered fraud.

Learn more about debts you can't discharge in bankruptcy.

Presumptive Fraud and Credit Card Use Before a Bankruptcy Filing

It's even easier for a credit card company to challenge the dischargeability of a debt when the creditor can automatically demonstrate fraud without further proof. "Presumptive fraud" can occur in two ways:

  • you purchase luxury goods within 90 days of filing for bankruptcy totaling $800 or more from one creditor, or
  • you take a cash advance within 70 days of filing for bankruptcy totaling $1,100 or more from a single creditor.

You'll notice that this applies to luxury goods and cash advances. Necessary items and services, such as rent, utilities, food, and modest clothing, aren't considered luxury goods. (11 U.S.C. § 523(a)(2)(C)(i)(l).) So if you use your credit card for food for your family because you have no other way to pay, you won't run afoul of the presumptive fraud prevision.

The current figures are valid for cases filed between April 1, 2022, and March 31, 2025.

How the Credit Card Company Will Fight Your Bankruptcy Discharge

When you file for bankruptcy, your credit card company will look at your transaction history to see if you made any large purchases before filing. 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.

If you don't respond to the lawsuit, the credit card company will obtain a default judgment against you, and the court won't discharge the debt. If you do reply, you'll likely spend 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.

Because of the high cost of litigation, most people facing an adversary proceeding for fraud negotiate to repay the debt, sometimes for a lesser amount.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

You'll find fillable, downloadable bankruptcy forms on the U.S. Courts bankruptcy form webpage.

Chapter 7 and 13 Bankruptcy Form List

Bankruptcy Document Checklist

More You Might Like

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

Timing Your Bankruptcy Filing: When to Delay or Avoid Bankruptcy Altogether

Keeping a Credit Card in Chapter 7 Bankruptcy

Should I Ignore a Debt Collector's Calls and Letters?

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

Updated April 25, 2022

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