Bankruptcy and Credit Card Use: What You Need to Know

Bankruptcy and Credit Card Usage

If you’re struggling under a mountain of debt, you might have already toyed with the idea of declaring Chapter 7 or Chapter 13 bankruptcy .  Perhaps it was just a flitting thought, or maybe you’re seriously considering it.  But no matter what stage you’re at in any pre-bankruptcy planning, it’s vital for you to line up your proverbial ducks just in case you need to get in contact with a bankruptcy attorney.

Before declaring bankruptcy, many people attempt to live off of their credit cards or pursue debt reduction counseling in an effort to reduce their debts.  However, rather than spinning around in circles attempting to pay off a mountain of debt, it’s vital for financially-stressed consumers to understand – and put into action – the basics of pre-bankruptcy planning:

  1. Has the thought of declaring bankruptcy been flitting around in your head?  As soon as the seed of an idea about declaring bankruptcy has been planted in your head, it’s crucial for you to drop your credit cards.  Bankruptcy courts frown upon recent use of credit cards, and will make it difficult for you to file a successful case if they believe you’ve been using credit for pre-bankruptcy shopping sprees.  The only exception to this rule is if you need to use credit cards to pay for necessities, like food and utility bills.
  2. If you’re struggling under a pile of debt, forgo the purchase of any luxury items.  While this might seem like commonsense financial advice, it’s also crucial if you suddenly decide to file for bankruptcy.  New bankruptcy laws enacted in 2005 mean that consumers cannot eliminate debt that’s accrued from the purchase of a luxury good item within 90 days of filing for bankruptcy.
  3. Don’t think you can work through these loopholes by turning your credit into cash advances.  Bankruptcy law makes it impossible to discharge credit card debts accrued by cash advances of more than $750 that occurred within 70 days of filing for bankruptcy.
  4. Finally, if you have even the slightest inclination that your debts will eventually lead you down the road to bankruptcy, don’t take a vacation funded by your credit card.  Lenders have successfully blocked bankruptcy filings due to these vacations, as courts tend to see this behavior as fraudulent.

If you want to keep bankruptcy open as an option, do yourself a favor: limit your credit case use, and don’t wait to get in contact with a bankruptcy attorney .