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Credit Card Use Prior To Filing Bankruptcy

A common question I get from those contemplating bankruptcy is if they can continue to use their credit cards prior to filing bankruptcy or what effect their recent use of their credit cards will have on their bankruptcy case. In regards to the first question, my recommendation is don’t continue to use your credit cards if you are going to be filing bankruptcy in the near future. If however, you have made purchases on credit and now are faced with the reality that a bankruptcy case must be filed, you may end up paying back certain charges made on those credit cards.

The Bankruptcy Code provides that if a person incurrs debts on a credit card totaling more than $550.00 within 90 days prior to filing a bankruptcy case, there is a presumption that those debts are non-dischargeable and will likely have to be paid back. However, this rule only applies to purchases for “luxury goods or services." See 11 U.S.C. § 523(a)(2)(C). This leads to the question, what are considered “luxury goods or services?" The Code specifically states that “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." 11 U.S.C. § 523(a)(2)(C)(ii)(II).

What all this means is if you use your credit card within 90 days before filing bankruptcy, and if what you purchase is not reasonably necessary for the support of you or your family, you may have to pay it back. The opposite is also true — if you purchase something on a credit card within 90 days of filing that exceeds $500.00 and is necessary for the support of you or your family, you will likely not have to pay it back. Things like groceries or gas for your car so you can get to work could be examples of items necessary for the support of your family.

Because your credit card statement only provies a total amount of a purchase and the store where the purchase took place, I have actually had creditors raise objections based upon the store where a purchase was made. For example, you are much more likely to get an objection to a purchase made at Best Buy or some other electronics store than you would for a purchase made at your local grocery store. I have even had a creditor distinguish between a charge at Target as compared to Super Target (because Super Target carries groceries while Target generally doesn’t). In sum, you should avoid usuing your credit card if you are planning on filing bankruptcy, but minor use for necessities will likely not raise an objection from your creditors.

Similar to the 90 day rule on credit card purchases, the Code provides that if you take a cash advance from a credit card (or use a credit card check), within 70 days prior to filing your bankruptcy case, there is a presumption that those funds are non-dischargeable. See 11 U.S.C. § 523(a)(2)(C)(i)(II). The presumption only arises if the cash advance was more than $825.00. General rule on cash advances, don’t take them out within 70 days prior to filing your bankruptcy, and if you did take out a cash advance and must file, plan on paying it back.

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