Credit card debt and bankruptcy
July 23, 2012
If you are considering filing for bankruptcy, you might wonder what you should do about your credit card debt. You should know that it is generally not advisable to pay off your credit card debt or to continue to use your credit cards prior to filing for bankruptcy.
Don’t pay off credit card debt before filing bankruptcy
All payments made to creditors that total in excess of $600 during the 90 days prior to filing for bankruptcy must be disclosed during bankruptcy. It is possible that those payments may be seen as “preferential” under bankruptcy law, and that can cause problems for both you and the creditor.
Bankruptcy law is designed so that all creditors in the same position are treated equally when it comes to repayment, and you do not want to give the impression that you gave special treatment to your credit card company over other creditors.
Don’t make credit card purchases right before filing
Bankruptcy should not be used to run up credit card debt for purchases you know you will not be able to repay. It is deemed fraud when you make last minute credit card charges and then instantly file for Chapter 7 bankruptcy. Not only will those debts be disqualified from bankruptcy protection, they could also prevent you from being granted any bankruptcy relief at all. You could also face criminal charges for fraud.
Even though Chapter 13 bankruptcy does not discharge debts completely, and you are expected to repay as much of your credit card debt as possible over time, it’s still not advisable to continue to use your credit cards before filing.
Will you be able to keep your credit cards after bankruptcy?
It is up to each credit card company to determine whether you will be able to keep your credit cards, but most companies will close your accounts during bankruptcy. This is true regardless of the balance on the cards.
There may also be other more complicated and nuanced concerns related to credit card debt and filing for bankruptcy protection. It is important to know all the facts and to seek out trusted advice.
Source: Fox Business Online, “Pay Off Credit Cards Before Bankruptcy?” Justin Harelik, July 3, 2012.