As a local bankruptcy lawyer here in Texas, 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 or another type of bankruptcy, marks a significant point in anyone’s financial journey. Chapter 7 bankruptcy offers a chance to reset by eliminating debts, including credit card debt. Yet, it requires careful planning and decisions, especially in the months before 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 curb or halt discretionary spending on your credit cards. Ideally, stopping entirely is best. Although filing for Chapter 7 allows 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. Hence making it clear that stopping usage is the best option.
Incurring large debts or making unnecessary credit card charges you know you cannot repay may be seen as fraudulent credit card use by the bankruptcy court. This could lead to complications in your case, including objections from creditors and the bankruptcy trustee.
Seek guidance from an experienced Texas bankruptcy attorney early in the process. They can protect you from debt collectors and provide legal advice.
Understanding Presumptive Bankruptcy Fraud
Bankruptcy law includes specific provisions designed to prevent abuse and ensure fairness to creditors, including credit card companies. 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 scrutinize your purchases before filing for Chapter 7 to look for any sign 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 before filing Chapter 7 is 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. But continuing to make payments on debts that you’ll soon seek to discharge through bankruptcy may feel like a waste of your money. To strike a balance, we recommend consulting a bankruptcy attorney from a firm like Warren & Migliaccio to tailor a strategy for your situation. A qualified attorney can guide you after evaluating your financial situation. They’ll explain the potential consequences of continuing or stopping credit card payments.
Seeking professional advice is essential, especially in matters as important as bankruptcy. This ensures 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 bankruptcy discharge, you can start rebuilding your credit with secured cards or other options.
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:
1. Groceries
2. Housing Costs
3. Medical Expenses
4. Transportation
5. Other Basic Necessities.
Additionally, be transparent about all your transactions with your legal counsel. Providing comprehensive and truthful information ensures your attorney can assess your situation. Hence, navigating pre-bankruptcy spending requires a clear understanding of legal ramifications. It demands a practical outlook on future finances and open communication with legal counsel. Likewise, 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 doesn’t mean creditors will freeze your bank account, but it does offer bankruptcy relief by halting creditor actions through the automatic stay. Ultimately, creditors will be notified of your bankruptcy filing, especially if your debts include credit card balances.
A 2020 report from the American Bankruptcy Institute (ABI) states that most Chapter 7 cases are “no-asset cases.” This means debtors keep most, if not all, of their property.
Laws vary by state, but federal and state regulations provide some protection for personal property through “bankruptcy exemptions.” Consult an experienced bankruptcy lawyer in your state to understand the rules that apply to your situation.
Conclusion
Knowing when to stop using credit cards before filing Chapter 7 bankruptcy is crucial. Your actions leading up to your filing 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 jobs 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. Actually, I want to ensure 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, 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 whether to stop using credit cards before filing Chapter 7 bankruptcy can be stressful. You don’t have to face this alone. Our experienced Dallas bankruptcy attorneys are here to help. We offer guidance, support, and legal advocacy during these challenging times.
Whether deciding to stop using credit cards before filing bankruptcy or dealing with other bankruptcy issues, we’re here to help. Schedule a consultation to discuss your situation and goals. 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 free consultation.
