Few days ago, a couple came to me and I pulled out their credit report. They were heavily indebted to various credit cards. They pressed me to file bankruptcy immediately. Once I told them that their credit cards has still some balance, they wanted to come back again and file. I told them what is the reason of their change of mind. They told me that they wanted to use the balance in their credit cards and then come back and file bankruptcy. I was surprised on their logic. They were acting upon the logic of their co-worker who did use his balance before filing bankruptcy. I told these folks that it would be an abusive practice and would violate the bankruptcy Code.
What is an abusive practice?
The U.S. Bankruptcy Code at 11 U.S.C. § 523(C) sets forth evidentiary presumptions allowing the bankruptcy trustee or an individual creditor to automatically presume a particular credit card purchase or cash advance is non-dischargeable. If the presumption applies and is not rebutted with evidence introduced by the debtor, the debtor will continue to owe that particular debt.
Specifically, the code states that a debtor’s discharge will exempt the following from the discharge:
(I) consumer debts owed to a single creditor and aggregating more than $600 (as of April 1, 2010) for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be non-dischargeable; and
(II) cash advances aggregating more than $875 (as of April 1, 2010) that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be non-dischargeable.
As a result of 11 U.S.C. § 523(C), debtors are advised to make no purchases on credit cards in the three months (90 days) before their bankruptcy filing in order to ensure that the above presumption does not attach, and significantly reduces the likelihood that the trustee or a creditor will object to the discharge of a particular debt.
Unfortunately, sometimes it is not possible to wait the full 90 days. Some debtors need to seek the protection of the Bankruptcy Court to prevent foreclosure, to stop a pending lawsuit, or prevent repossession of a particular secured asset. In these cases, many debtors will have made recent purchases within the 90-Day period. It is important to discuss these purchases with your bankruptcy attorney, as things like travel, vacations, electronics or computer purchases may all be deemed “luxury” under the statute. However, you may have a case if they are used for “necessity” and not for luxury goods, or gambling debts.
At the §341(a) meeting, nearly all Chapter 7 Trustees in Nevada will ask whether a creditor has “used any credit card in the past 30 days prior to filing bankruptcy”. The trustee is attempting to evaluate the likelihood that an 11 U.S.C. § 523(C) Complaint to Object to Discharge will be filed. While use of credit cards in the 30 days prior to filing is not proof of abuse (and grounds for non-dischargability), it would raise the trustees suspicions that further investigation is warranted. We recommend strongly against the use of credit cards for 90 days or longer before you file bankruptcy in Nevada. One should be careful of using credit cards at least 6 months prior to the filing of chapter 7, and it is even better if the debtor stops using altogether at least one year prior to filing of bankruptcy.