As a bankruptcy attorney here in Texas, potential clients often call me with questions about the Chapter 7 filing process. But sometimes, they call me eager to share their own ideas as well. Pete was one of them.
“Hi Chris,” Pete began, excited. “I know we might file for bankruptcy next month if I don’t get that job. I told my friend about it, and he suggested…”
“Pete, stop,” I interrupted, sensing where this was headed. “If your friend suggested charging a vacation to your credit card before filing for Chapter 7, that’s a bad idea. Charging unnecessary expenses with the hope that they’ll be discharged is not how you should approach this.”
“Well, I’ll skip what he said then,” Pete replied. “But I called to ask how I should handle my credit card over the next few weeks.”
“That’s a smart question, Pete,” I told him. “It shows you’re thinking ahead about setting yourself up for a successful Chapter 7 outcome. There’s a lot to consider about using your credit card responsibly before filing, and I can help with that.”
Knowing when to stop using credit cards before filing Chapter 7 is critical for anyone facing financial difficulties like Pete. While bankruptcy can provide a fresh start, your financial actions beforehand can impact your case. Using credit cards with the mindset that debts will be discharged could have serious consequences, including accusations of fraudulent use. Understanding when and how to stop using credit cards before filing is essential to ensure a smooth bankruptcy process.
Navigating Credit Card Use Before Chapter 7 Bankruptcy
The decision to file for bankruptcy, particularly Chapter 7, marks a significant point in anyone’s financial journey. Chapter 7 bankruptcy, known for its ability to potentially eliminate various debts, including credit card debt, provides a chance to reset. But, like any legal process, it demands careful consideration and thoughtful decisions, especially in the months leading up to filing.
When Should You Stop Using Credit Cards Before Filing Bankruptcy?
The straightforward answer is this – the moment you realize you are considering bankruptcy, you should significantly curb or halt discretionary spending on your credit cards. Ideally, stopping entirely is best. Although filing for Chapter 7 might allow you to erase your credit card debts, continuing to use them after this realization could raise red flags indicating you might be taking advantage of the situation.
This behavior, especially when incurring large debts you know you cannot repay, might be interpreted as fraudulent use of your credit card by the bankruptcy court. Such actions may lead to complications in your bankruptcy case, including potential objections from creditors and the appointed bankruptcy trustee. Therefore, it’s also crucial to seek guidance from an experienced Texas bankruptcy attorney as early in the process as possible to fully understand the implications of your financial actions and receive sound advice.
Understanding Presumptive Fraud in Bankruptcy
Bankruptcy law includes specific provisions designed to prevent abuse and ensure fairness to creditors. The concept of “presumptive fraud” falls under these provisions and directly relates to using your credit cards before filing. Presumptive fraud essentially means that the court automatically assumes fraudulent intent if you engage in certain financial activities within a specific time frame before filing.
The court can automatically presume fraudulent intent with credit card usage for the following:
- Charges for “luxury goods and services” exceeding $800 from a single creditor within 90 days of your filing.
- Cash advances totaling over $1,100 within 70 days of your filing.
It’s important to note that these thresholds were adjusted on April 1, 2022, and will remain in effect until March 31, 2025, as outlined by 11 U.S.C. § 523(a)(2)(C)(i)(l).
Luxury items usually include non-essential goods and services like:
- High-end electronics
- Designer clothing
- Expensive jewelry
- Vacations
- Entertainment
This is not a complete list. Any purchases deemed extravagant or unnecessary for daily living can fall into this category. Creditors are also likely to closely scrutinize your purchases before filing for Chapter 7 to look for any indication of intent to defraud. If the creditor suspects foul play, they can challenge the discharge of your debts. They can then file a lawsuit known as an “adversary complaint.” Winning such a case could make you remain responsible for the debt, even after your Chapter 7 bankruptcy is final.
Necessary Expenses vs. Luxury Purchases
Distinguishing between necessary expenses and luxury purchases in the period before filing Chapter 7 is extremely important. When struggling financially, using credit cards for necessities is understandable. Using your credit cards to cover basic living expenses like groceries, gas for your car, and utilities while genuinely unable to pay with available funds is generally acceptable.
But remember, it’s important to keep detailed records of these expenses in case your spending comes into question during the bankruptcy proceedings. It also might be a good time to see if your friends or family are willing to loan you money that they consider a “gift.” These “gifts” might not have to be paid back in a Bankruptcy Case. However, be sure to speak with a bankruptcy lawyer about how much of a “gift” is appropriate under the law to help avoid the “presumption of fraud.”
FAQs about when to stop using credit cards before filing chapter 7
FAQ 1: Should you stop paying credit cards before filing Chapter 7?
Stopping credit card payments prematurely could harm your credit score and even lead to legal action by creditors. You could incur extra fees and penalties, too. However, continuing to make payments on debts that you’ll soon seek to discharge through bankruptcy may feel like a waste of your money, especially when your financial resources are already strained.
To strike a balance, we always recommend consulting with a seasoned bankruptcy attorney from a firm like Warren & Migliaccio to tailor a strategy for your situation. After carefully evaluating your financial circumstances and bankruptcy goals, a qualified attorney can guide you. Based on your financial standing and legal obligations, they’ll help you understand the potential ramifications of continuing or halting credit card payments before filing. Seeking professional advice is always recommended, but especially so in matters as consequential as bankruptcy, ensuring that your actions align with both the spirit and the letter of the law.
FAQ 2: Can I keep one credit card if I file Chapter 7?
Generally, you cannot pick and choose which debts to eliminate in Chapter 7 bankruptcy. Your unsecured debts, including medical bills, personal loans, and credit cards, are all eligible for discharge. It’s best to assume that all of your credit cards will be included in the bankruptcy and likely closed. After your Chapter 7 discharge, you can start rebuilding your credit with secured cards or other options designed for post-bankruptcy recovery.
FAQ 3: How do I spend money before filing Chapter 7?
The prospect of eliminating debts through bankruptcy might tempt you to make large purchases or live extravagantly beforehand. Many debtors ponder using remaining credit or cash for non-essential items or services. This decision could backfire, potentially impacting their bankruptcy eligibility and jeopardizing their financial fresh start.
Instead of splurging, use your remaining funds or income on essential expenses like:
- Groceries
- Housing Costs
- Medical Expenses
- Transportation
- Other Basic Necessities.
Additionally, be transparent about all your transactions with your legal counsel. Providing comprehensive and truthful information ensures your attorney can accurately assess your situation. Ultimately, navigating pre-bankruptcy spending requires a clear understanding of legal ramifications, a practical outlook on future finances, and open communication with legal counsel, setting the stage for a smoother transition to a debt-free future.
FAQ 4: Do they freeze your bank account when you file Chapter 7?
Filing for bankruptcy does not automatically mean that creditors will freeze your bank account. However, be prepared for your creditors to receive notification about your bankruptcy filing, especially if your debts include credit card balances. According to a 2020 report from the American Bankruptcy Institute (ABI), most Chapter 7 cases are “no-asset cases,” meaning debtors typically retain most, if not all, of their property. While the laws vary depending on where you live, federal and state regulations offer a degree of protection for personal property through “exemptions.” Consult with an experienced bankruptcy lawyer from your state for a complete understanding of the applicable regulations.
Conclusion
Knowing when to stop using credit cards before filing Chapter 7 bankruptcy is crucial. Your actions leading up to your filing significantly affect your case. Understanding presumptive fraud and differentiating between necessary expenses and luxury items is paramount. If you need help figuring out how to best protect yourself or are feeling lost or overwhelmed with this complex process, connect with our dedicated North Texas bankruptcy lawyers. We’re ready to provide you with compassionate legal counsel as you strive to rebuild your financial future. Contact us today for a free case evaluation to get started.
How Will Pete Use His Credit Card?
“Chris, I understand that the bankruptcy laws are designed to give good people like me who lost their job a fresh financial start. I don’t want to do anything that might jeopardize that opportunity,” Pete said to me. “My goal will be to stop using my credit card completely. I’m just not sure if I can though. I’ve got to eat.”
“Pete let’s assume this new job doesn’t come through and we’re going to have to file for bankruptcy in the next few months,” I told him. “I hope you get the job but let’s be prepared if you don’t. I’ll want to review your recent credit card transactions and make sure there are no potential issues with presumptive fraud already charged to the card.”
“Oh no, Chris, I haven’t bought anything beyond basic necessities in months,” he told me. “No vacations, no new electronics, not even out to dinner, well once two months ago but that was for my girlfriend’s birthday. Kind of a necessity, don’t you think?”
“Well, maybe Pete, but let’s keep anything that’s not groceries or maybe gas for your car off the credit card. Do you have any other source of money?”
“My savings are dwindling, but I have a little left,” Pete said. “Maybe my friend can gift me some cash since we’re not going on vacation now.”
“I’d be cautious with that friend, but using savings or a trusted gift would help. If you must use the card for food or gas, just document the purchases to show you’re being responsible and not abusing the bankruptcy process.”
“Thanks, Chris. Now I have a better idea of how to proceed. I’ll use the credit card as little as possible, and only for necessities, while hoping the job comes through.”
Schedule a Consultation with our Dallas Firm to Learn About When to Stop Using Credit Cards Before Filing Chapter 7
Deciding if you should stop using credit cards before filing chapter 7 bankruptcy can be stressful and challenging, but you do not have to face it alone. Our team of experienced Dallas bankruptcy attorneys is ready to provide you with the guidance, support, and legal advocacy you need during these challenging times.
Whether you are trying to decide if you should stop using credit cards before filing chapter 7 bankruptcy or navigating other bankruptcy related issues, we are here to help you every step of the way. We welcome you to schedule a consultation to discuss your situation and case objectives. We can answer your legal questions and discuss how we can help you move forward. Call our law office at (888) 584-9614 or contact us online to schedule your consultation. Get Help Now!
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