I paid off some student loans with a credit card. Can I discharge them in bankruptcy?

Find out if you can wipe out a credit card balance in bankruptcy after using the card to pay student loans.

By , Attorney

Question

I paid off some student loans with a credit card, and although I planned to pay off the balance, I've run into financial difficulties, and I'm considering filing for bankruptcy. Can I discharge my credit card balances in bankruptcy?

Answer

Typically, it is difficult to "discharge" or wipe out student loans in bankruptcy. On the other hand, bankruptcy discharges credit card debt almost automatically. But that doesn't mean you can work around the discharge rules by paying your student loans with a credit card and then discharge that debt in bankruptcy.

Find out when the tactic won't work and why you might end up paying more in attorney's fees.

Discharging Student Loans in Bankruptcy

Discharging a student loan in bankruptcy isn't automatic, easy, or cheap. You must meet the "hardship standard" by proving to the court that repaying your loans would cause you or your dependents great difficulty. You'd start by filing a bankruptcy lawsuit called an "adversary proceeding," and the costs won't be included in the amount spent to file your bankruptcy. Your bankruptcy attorney will charge extra for the litigation costs.



Discharging Student Loan Debt Paid With a Credit Card in Bankruptcy

You might be thinking that because you can discharge credit card debt, perhaps you should pay off your student loans with your credit card before filing for bankruptcy. Although this might seem like a simple and attractive option, this tactic can backfire. The rule is simple—it will depend on the bankruptcy chapter you file:

  • In Chapter 7, if the credit card holder challenges the student loan charges in an adversary procedure, the court won't discharge the debt.
  • The rules are different in Chapter 13—you can discharge student loan debt charged to a credit card. You'll pay a portion of the debt through your Chapter 13 plan, and the court will discharge any remaining balance at the end of your plan.

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

How a Credit Card Holder Proves Fraud in Chapter 7 Bankruptcy

There are several ways a creditor can allege fraud in bankruptcy that you'll want to be aware of so you can steer clear of any wrongdoing (a showing of fraud can result in fines or even incarceration).

Charges for Luxury Goods and Cash Advances

If you made the charges within the 90 days before you filed for bankruptcy, the lender might claim that they are not dischargeable because the charges were for "luxury goods or services." Taking cash advances within 70 days before bankruptcy is also problematic.

Both fall into the category of "presumptive fraud." The creditor doesn't need to prove fraud at all because the court presumes fraud automatically. Learn more about how running up credit cards before filing can be bankruptcy fraud.

Fraudulent Charges

Lenders also challenge charges made through false pretenses, a false representation, or actual fraud. Debt incurred with the plan to discharge it in bankruptcy—not pay it—counts as fraud for bankruptcy purposes.

The courts look at several factors, including:

  • the timing of the transactions
  • the interest rate on the student loan compared to the interest rate on the credit card
  • the amount of the transaction
  • whether you transferred the balance in a lump sum or as student loan payments came due, and
  • if you were insolvent—owed more debt than your assets were worth—when you made the charges or experienced a change in circumstances after you made the charges.

Below are some examples of what a judge might consider when determining whether you had fraudulent intent when you paid your student loans with a credit card before filing for Chapter 7 bankruptcy.

Example. Darla has a $5,000 student loan with a 6% interest rate. She moved the student loan balance to her new credit card with an interest rate of 15% using a balance transfer check. Darla files for Chapter 7 three months later. Moving her balance to a card with a higher rate makes little financial sense unless she figured that she would not have to pay it, especially when she filed the bankruptcy case shortly after that.

Example. When Alice lost her job, she contacted the bank to work out a reduced payment plan for her private student loan. The bank officer suggested that she use her credit card to make the payments until she found a new job. Her unemployment lasted much longer than expected, and a year later, she filed for Chapter 7 bankruptcy. Relying on her credit card to pay expenses during a period of unemployment would suggest that Alice's intent was good and not fraudulent.

How Would a Creditor Challenge a Bankruptcy Discharge?

The creditor has sixty days after the meeting of creditors to file an adversary proceeding to challenge the dischargeability of the credit card charges. If the creditor fails to file the adversary proceeding within that period, the court will discharge the debt.

What Happens If the Bankruptcy Court Doesn't Wipe Out Credit Card Debt?

If the bankruptcy court finds in favor of the credit card lender, here's what might happen:

  • you remain liable for the credit card charges
  • the court might find that your entire credit card balance is not nondischargeable
  • you'll probably have to pay your attorney a separate fee for defending the lawsuit, and
  • you might have to pay the credit card company's attorneys' fees and costs.

Alternatives to Discharging Student Loans in Bankruptcy

Other options for handling your student loan payments include loan consolidation, income-based repayment plans, and even student loan forgiveness programs. Find out more about repaying student loans.

Navigating Your Bankruptcy Case

Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.

The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.

More Bankruptcy Information

Bankruptcy Forms

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

Related Information

Can I use my credit card before I file for bankruptcy?

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

Need More Info?

We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.

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 consulting with a local bankruptcy lawyer.

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