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Bankruptcy and Credit Cards ‐ Don’t Charge Up Before Filing

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“Charging up” credit cards before entering a bankruptcy filing may seem on the surface appealing. After all, credit card debts and other unsecured obligations are typically obliterated by Chapter 7 filings, so why shouldn’t you put your plastic to its maximum use before giving it up for good?

There are number of reasons why this is a bad idea. If you charge in excess of $1,150 within two months prior to your filing, your trustee and the bankruptcy court may prevent you from discharging that debt — even if it is unsecured — since those moneys appear to the court to be extravagant debt. Of course, the court may look differently on your credit card purchasing surge if you have had to pay for medical bills or other urgent, non-discretionary purchases.

Remember not to try to hide secured or nonexempt assets from the bankruptcy court by putting them on your credit cards. For instance, let’s say that you owe $40,000 in back income taxes.

In the run up to bankruptcy, you might try to stuff a few thousand dollars worth of owed taxes onto your cards in the hopes that, when your credit cards get discharged, your income tax obligations will go away as well. Not only is this practice unethical, but it can be also result in major logistical/legal problems for your bankruptcy filing.

In truth, it can help you to pay off your credit cards prior to filing — particularly if you do so six months or more before applying for the automatic stay against your creditors. After all, if you maintain a card with zero balance during your bankruptcy filing, your credit card issuer may allow you to keep your card after you’ve made it through the bankruptcy settlement.

There is no guarantee that your company will let you maintain the card, but if you have a zero balance to begin with, you stand a better chance. Particularly if your credit card offers good terms and conditions — low annual fees and relatively modest interest rates — it’s a good idea to keep it around, since post bankruptcy, you’ll likely only be able to qualify for high interest, high annual fee cards.

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