Avoid using credit during the holidays if you’re thinking about bankruptcy. But if you do so, or are tempted to, read this.
December tends to be the slowest month for consumer bankruptcy case filings. With the busyness of the holiday season and its focus on family celebrations, it’s understandably hard for you to find the time or the emotional energy to deal with your debt frustrations.
During this same time of year your expenses go up, with all the gift-giving and gatherings with family and friends going on. These expenses are often too high to be covered by your regular paychecks, so there’s the inevitable temptation to use credit cards or other forms of borrowing to cover those expenses.
So there should be no surprise that business picks up at the bankruptcy courts in January, February and into the spring, as the bills become due—and overdue.
Using Credit Before Filing Bankruptcy
No matter whether you file bankruptcy before or after January 1, using credit during the holidays is dangerous. It could be considered fraud.
What is “Fraud” in Bankruptcy?
If you cheat a creditor in the way you got the debt, you may not be able to discharge (legally write off) the debt. Credit cards and similar debts ARE usually discharged without any problem. But if you made a misrepresentation to a creditor in order to qualify for or to use credit, that creditor could challenge your ability to get its debt discharged. The idea is that honestly incurred debts should generally be discharged, but ones gotten through lying to the creditors should not.
Misrepresentations with Credit Card Purchases and Cash Advances
A special kind of possible misrepresentation comes into play with credit cards and other similar open-ended forms of credit. At the moment that you are using a credit card to make a purchase or to get a cash advance, you are in effect telling the creditor that you intend to pay that new debt.
But what if you actually don’t intend to pay that debt? What if you had recently decided to file bankruptcy a few weeks later, but figure that in the meantime you might as well use some of the credit that’s available? That would likely be seen as a misrepresentation, one which could result in the creditor’s challenge to the discharge of that debt.
What’s a “Presumption of Fraud”?
Bankruptcy law accepts the reality that it’s not easy for a creditor to know what was in your head at the moment you made a purchase or a cash advance—much less to prove it in court. So the law gives the creditors a leg up. It says that under certain very specific circumstances involving the timing and amount of the purchase or cash advance, the law will presume that you used the credit without intending to pay it.
Specifically, if you buy more than $650 in “luxury goods or services” (which, surprisingly, applies to just about anything which isn’t a necessity) from any single creditor during the 90-day period before your bankruptcy is filed, that specific debt is presumed not discharged. The same way, if you make a cash advance of more than $925 from any single creditor during the 70-day period before your bankruptcy is filed, the debt reflecting that cash advance is presumed not discharged.
The Presumption Can Be Defeated
If you make a purchase or cash advance within these time periods and the creditor complains about it to the bankruptcy court, that doesn’t necessarily mean that you will have to pay the challenged debt. If you in fact HAD intended to pay the debt at the time you made the purchase or cash advance, you can still win by persuading the court of that honest intent—through your own testimony or by showing other relevant facts, such as what happened in your life after you made the challenged purchase or cash advance that subsequently convinced you to file bankruptcy.
Creditor Must Complain or Else the Debt is STILL Discharged
Even if the timing and dollar amount would mean that one of the presumptions would apply, that debt would be discharged—regardless how good or bad your intention was—if the creditor does not make a formal complaint about it, and does so on time. Creditors often don’t bother complaining, because the amount at issue is too small to justify them spending the attorney fees and other costs to make you pay it.
The good news is that the deadline for creditors to complain is quite a quick one—60 days after your “meeting of creditors”—so it’s usually within about a hundred days after your case is filed. Once that deadline passes you don’t need to worry or wonder if any creditor is going to complain, because they can’t after that.
Fraud Can Be Proved BEYOND the Presumptions
Careful not to think that purchases or cash advances that you make earlier than these 70- and 90-day periods necessarily mean you’re home free. The presumptions just give the creditors a leg up, but they are free to try to prove a misrepresentation regardless how long ago it happened.
For example, if someone took out a $10,000 cash advance for a fancy Mediterranean cruise, and then filed a bankruptcy case 71 days later, the 70-day presumption wouldn’t apply. But the creditor would nevertheless likely be pretty motivated to challenge your ability to discharge that $10,000 debt. Depending on the circumstantial evidence about your financial life when you took out the cash advance, it may not be that hard for the creditor to convince a judge that you didn’t honestly intend to pay that debt.
As we indicated in the first sentence of this blog post, it’s best to avoid using credit for at least several months before filing bankruptcy. So in general you should not finance the holidays on whatever credit you may have available, because it may lead to a delay in filing a bankruptcy afterwards to avoid the presumption period. But what you should do truly depends on your unique set of facts. If you have recently already used credit, see a bankruptcy attorney sooner rather than later to determine—in the totality of your circumstances—your best course of action.