Credit Card Use Before Bankruptcy

There is nothing fundimentally wrong with having used credit cards prior to meeting with a bankruptcy attorney, so long as the use was ordinary and for necessities.  However, debtors should be careful not to use their credit cards after speaking with an attorney without discussing it with the attorney.  And a debor certainly cannot frivolously "max out" cards or purchase luxary goods before filing.  This could result in the debtor's discharge being denied.

The relevant law is at 11 U.S.C. 523:

A discharge ... does not discharge an individual debtor from any debt... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition....

The bottom line is really not that complex: a debtor cannot discharge debt which was incurred without a good faith intent to repay. 

The bankruptcy law also looks at factors to determine whether there was an intent to repay:

consumer debts owed to a single creditor and aggregating more than $600 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable....

the term “luxury goods or services” does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor;

So if a person uses credit cards for luxary goods or services which totals more than $600 within 90 days of filing a bankruptcy, the weight will be against that person in proving an intent to repay the debt.  Although circumstances might exist to explain the expenditure, but it will be much more difficult to prove.  If it cannot be proven, that debt which is deemed fraudulent may be held non-dischargable.  There is also a risk the entire case will be dismissed for bad faith.

Whether to Keep the Home is not Always an Easy Decision

Many of the people I consult with own a home.  Some are behind on payments and facing a foreclosure.  Others are current on the home, but have fallen behind in other areas.  It is true that bankruptcy can help in these situations, but the first question must always be: is the home worth saving? 

A bankruptcy will not change the monthly payment on your primary residence.  I've consulted many clients who initially wanted to save their homes more than anything, but after considering how much they owed, how much the home was worth, and what the actual costs of home ownership compared to renting were, they decided that walking away was a better decision.  I haven't heard anyone who has regretted walking away from a $100,000.00 home to discharge $175,000.00 of debt and $1000+ per month payments.

Second, it's important to understand the limitations of bankruptcy.  A chapter 13 bankruptcy allows you to repay the amount you're past due on your home, in addition to making the regular monthly payments, over a 3 to 5 year repayment plan.  Other unsecured creditors are kept at bay and eventually discharged in whole or in part. 

Thus, you have to be able to afford your monthly mortgage payments.  If you cannot currently afford your payments, or if you'll be "house poor" making the payment each month, you need to consider surrendering the home.  There are some exceptions, like "stripping off" a wholly unsecured junior mortgage, which can make the home affordable.  It is important to talk to a bankruptcy attorney to make sure you know all of your options.

Finally, timing is important.  After the foreclosure sale, a chapter 13 bankruptcy cannot force the lender to accept payments in Michigan.  A chapter 13 must be filed before the sale, which means you need to speak with an attorney sooner, not later.  

The bottom line is that deciding what to do with your home is not an easy decision.  A free consultation can help you understand your options, and make the right choice.

FAQ: Can I Choose Which Debts to Include in My Bankruptcy?

When Is It Time To Consider Filing for Bankruptcy?

There are a number of "red flags" which indicate it's time to at least talk to a bankruptcy attorney:

• You're falling behind on monthly bills to make your minimum credit card payments;
• You've considered calling a debt settlement company, or have called one;
• You're at risk of having a vehicle repossessed;
• You're at risk of having your home go into foreclosure;
• A creditor is demanding a deficiency payment after a repossession or foreclosure;
• You're mortgage company is offering you a "short sale" to avoid a deficiency;
• A debt collector is threatening to, or has already, sued you;
• You're afraid of money being garnished from your wages or bank accounts;
• You've considered pulling money out of your retirement to pay bills;
• You're thinking about transferring assets to protect them from creditors;
• You're income will be increasing in the near future (potentially affecting your filing);
• You may have an inheritance coming in the next few years;
• You're losing sleep, stressed out about your debt, and the phone won't stop ringing.

If one or more of the above apply to you, you should go talk to a local bankruptcy attorney immediately. Bankruptcy might not be the answer, but better to ask too early than too late. There may even be factors which indicate bankruptcy is not right such as recent large payments to creditors, payments to relatives, recently incurred debt, or an eminent inheritance.

But too often the stigma surrounding bankruptcy alone discourages people from even asking for information until it's too late, resulting in lost time, money, and property.  Most attorneys (including me) charge nothing for the initial consultation.  

It's confidential and there is no obligation.  So why not get the information?

Save your retirement, property, and your sanity; you're going to need all three!