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 · University of the Pacific McGeorge School of Law

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 for 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 for Bankruptcy for Credit Card Debt

Most bankruptcy filers can get rid of or "discharge" credit card debt in bankruptcy. You can eliminate credit card debt 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 or "discharged" at the end of the case.

Can I Use My Credit Card If I'm Planning to File for Bankruptcy?

You can use your credit card for necessary purchases, such as food, clothing, utility bills, and car repairs. However, charging unneeded luxury items on a credit card shortly before filing for bankruptcy can be problematic. For instance, you wouldn't want to charge a vacation or buy a Gucci purse on credit knowing you can't pay the bill and plan to file for bankruptcy.

Why Shouldn't I Max Out My Credit Cards Before Filing for Bankruptcy?

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.

When Should I Stop Using My Credit Cards Before Filing Chapter 7?

It's best to stop charging purchases when you determine you're "insolvent" and can't pay your debts and plan to file for bankruptcy. If you went ahead with lavish credit spending, the credit card company could argue you knew you couldn't pay for the purchase and had no intention to do so.

It's even easier for a creditor to prove fraud when you charge items during the 90 days before the bankruptcy filing. So, it's best to stop charging on credit cards when you realize you can't pay your debts or 90 days before you file, whichever occurs sooner.

The exception to the "using credit cards before bankruptcy rule" involves necessary purchases. As explained earlier, charging items needed to live, such as food and gasoline for your car, will not be considered fraudulent credit card use.

Does Running Up Credit Cards Before Filing for Bankruptcy Meet the "Fraudulent Means" Test?

It can be if you use the card when you don't intend to repay the debt. The bankruptcy court can decide that you must repay a debt after bankruptcy if you incurred it by "fraudulent means." If so, the debt will be "nondischargeable," and you'll remain responsible for fully repaying it.

Suppose you visit a bankruptcy attorney and decide to file for Chapter 7. Afterward, you purchase items you don't necessarily need on credit with every intent to 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. Why? The credit card company is lending money based on your promise to repay it. Because you did not intend to repay it and bought unnecessary luxury items, the charges would likely be considered fraud under an "actual fraud" theory.

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 figures apply to cases filed between April 1, 2022, and March 31, 2025.

What Happens When Credit Card Charges Are Presumed Fraudulent?

The credit card company must first challenge the charges by filing a lawsuit or "adversary proceeding" in bankruptcy court. If the bankruptcy finds the purchases fraudulent under a presumed or actual fraud theory, they'll be nondischargeable, and you'll remain responsible for paying them.

How the Credit Card Company Will Fight Your Bankruptcy Discharge

When you file for bankruptcy, your credit card company will examine your transaction history to determine 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

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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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