Editorial Policy

Stop using credit cards before filing bankruptcy

Erica Sandberg

April 19, 2016

Q Hi Erica,

If I am going to file Chapter 7 bankruptcy in one month, can I still use my credit cards up until that time? I have two credit cards, one from Nordstrom and one from Wells Fargo, and both are still open and not yet at the limit. I have three other credit cards that are closed and in collections now, and the collection agencies are calling me all the time. I don’t have the money to pay, so I am filing for bankruptcy, which I already told the collection agencies.  — Nicole

A Dear Nicole,

I do hope you are asking this question innocently. For example, maybe you’re not trying to take advantage of lenders, but just want to clothe or feed needy children.

You didn’t say why you want to tap the remaining credit limits with the intention of discharging the entire resulting balance a month later, so let’s talk law.

You can’t go around charging up your accounts like a “Real Housewives” cast member on a shopping bender then simply wipe it all out in bankruptcy court. There will be an automatic presumption of fraud if you:

Withdraw more than $925 in cash from the credit card accounts within 70 days of filing.

Purchase over $650 worth of luxury goods and services with the cards 90 days before filing.

Do either of these things and you will not be able to discharge that portion of the balance incurred. That means you’d be stuck with this debt. But that’s not all. Most creditors will check the activity that occurred a few months prior to filing. These creditors can contest any of the charges, even if the charges don’t fit neatly within the above two scenarios.

If it appears that you continued to tap the accounts knowing you were about to file, you may have a fight on your hands that you could lose. Then you would be left with not just a Chapter 7 bankruptcy on your credit file that will follow you for 10 years, but also those disputed balances. If you don’t pay those disputed balances and that debt goes seriously delinquent, the creditor may sue you for damages. Lose the case and you may face serious consequences. For example, post-judgment collection action may include wage garnishment. That is when a portion of your earnings is redirected to the creditor until the debt is satisfied. The amount of the debt would increase, too, as you would have to pay court costs and other fees.

For these reasons, a good lawyer would advise you to stop all charging once you’ve made the decision to gain relief via bankruptcy protection.

Now, if you’re asking because you are truly desperate, there are safer and more ethical ways to deal with your problem. Perhaps you can turn to friends, family members, charitable organizations or government assistance for financial help. If you have older children, and they can work and contribute some of those earnings to the household, consider it.

For ideas specific to your unique circumstances, visit a nonprofit credit counseling agency that is certified to offer bankruptcy information as well as budget and financial advice. Visiting a credit counselor won’t cost you a penny, and most people find the experience worthwhile. Check out the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling for more information.

As far as the calls from collectors, they will end soon after you file the bankruptcy paperwork. The automatic stay will go into effect, which prohibits contact from creditors. If you want to stop the calls earlier, you can send a cease-and-desist letter. Upon receipt of that letter, creditors must make a decision: Take legal action against you or leave you alone.

Got a question for Erica? Send her an email.

SEE ALSO: 6 bankruptcy myths you probably think are true

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