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.

Updated: March 27, 2019

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 file an adversary proceeding (lawsuit) alleging fraud and asking the court to exclude the debt from your discharge. If successful, you’ll remain obligated to pay the debt.

How Bankruptcy Gets Rid of Credit Card Debt

Most bankruptcy filers can get rid of, or discharge, credit card debt in bankruptcy. In Chapter 13 bankruptcy, you pay off a percentage of your credit card debt through your repayment plan. The balance is wiped out at the end of your repayment plan. In Chapter 7 bankruptcy, your credit card debt is wiped out entirely without a repayment plan.

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.

Learn more about the bankruptcy discharge and your debts in bankruptcy in What Happens to Your Debts in Bankruptcy.

Maxing Out Your Credit Cards Before Filing Bankruptcy Can Be 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"? It can be 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 and you have no intention of repaying the debt.

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. You intend to keep the stuff without paying back the debt because of the bankruptcy.

This behavior would likely be considered obtaining credit by fraudulent means. You’re using your credit card, and the credit card company is lending money based upon your promise to repay it. However, the fact that you have no intent to repay would likely be considered fraud.

Presumptive Fraud

It’s even easier for a credit card company to challenge the dischargeability of a debt if the creditor can claim, or presume fraud automatically. This can happen in two ways:

  • you purchase luxury goods within 90 days of filing for bankruptcy totaling $725 or more from one creditor, or
  • you take a cash advance within 70 days of filing for bankruptcy totaling $1,000 or more from a single creditor.

These figures are current for cases filed between April 1, 2019, and March 31, 2022. Necessary goods 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).)

Learn more in Can my credit card company fight my bankruptcy?

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.

If you don't respond to the lawsuit, the credit card company will obtain a default judgment against you, and the debt will not be discharged. If you do respond, you will likely have to 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 as well.

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

Find out more in Credit Cards and Bankruptcy.

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