1. Home
2. Bankruptcy Articles
3. Hot Credit Card Issues in Bankruptcy

FAQ'S

Hot Credit Card Issues in Bankruptcy

1. What type of credit card dischargeability issues can arise if I file for bankruptcy?

If you are like most debtors, the difficult decision to file bankruptcy may be months if not years in the making. In an effort to avoid bankruptcy, you may have considered any number of non-bankruptcy options, that include informal payment plans, the refinancing of your house or borrowing funds from friends or relatives. Regardless of whether bankruptcy is a viable option, you should be very careful about turning to credit cards as a way to generate cash. In some cases your use of credit cards for purchases or cash advances can significantly limit the effectiveness of bankruptcy relief. Here is what you need to know.

The credit card industry was one of the biggest sponsors of the October, 2005 changes to the nation’s bankruptcy laws. Specifically, credit card companies lobbied very hard for changes to the law that would limit the discharge of credit card debts. There are two Bankruptcy Code sections that come into play with regard to credit card debts;

Bankruptcy Code Section 523(a)(2) provides that consumer debt owed to a creditor totaling $500 or more for “luxury” goods and services may not be discharged if that debt was incurred within 90 days prior to the bankruptcy filing. Cash advances that total more than $750 within 70 days prior to filing are non-dischargeable in bankruptcy.

As a practical matter, this means that if you use credit cards for any reason within the 90 days prior to filing, then your case will be red-flagged by the credit card company. Even if you have a defense (i.e., that your purchases were not for “luxury” items but were for food or medical care) you may find yourself in (expensive) litigation, if the credit card issuer files a non-dischargeability complaint.

The credit card companies sometimes challenge the  dischargeability of their debt in the bankruptcy process. The credit card company can by file a lawsuit within the bankruptcy case, and it is called an adversary proceeding. In this proceeding the credit card company can claim that the debt was incurred by fraud, and therefore should be discharged under §523(a)(2). This type of case is also referred to as a “non-dischargeability action.”

Credit card debts may be non-dischargeable in bankruptcy under either of two types of legal grounds:

a. The application submitted to obtain the card was fraudulent.

b. The credit card was used without an intent to repay. This is by far the most frequent ground that is used by the credit card companies to try to block your bankruptcy.

2. What are some of the “red flags” that the credit card companies use to evaluate whether to file an adversary case?

The credit card companies are ruthless. They don’t care if you are losing your home, if you are very sick, or if your marriage is falling apart because of the stress of dealing with high credit card balances. They have one goal in mind and that is to collect their debt. For any Star Trek lovers, the credit card companies are similar to the “Borg,” and their prime directive is to collect their debt at any cost.

The credit card companies hire law firms who work on a contingency basis to file adversary complaints. The firm of Weinstein and Reilly files the most adversary complaint in New Jersey. Before the law changed in 2005, the firm of Weinstein and Reilly filed a tremendous amount of adversary complaints to try to contest the dischargeabililty of credit card debts. In my opinion, they filed so many of them that they could not keep up with their caseload. Their main goal is to reach a quick settlement so that they would not have to litigate these type of cases in federal court. The bottom line is that it is extremely expensive to litigate any type of case in a federal court. Many debtors would pay 10% of the disputed credit card debt and resolve the case. After the law changed Weinstein and Reilly is still in business. However, they are not filing as many cases. Now, they are now sending out letters to debtors’ counsel, and threatening to file an adversary proceeding. However, for the most part they do not follow through with their threats of litigation.

In my professional opinion, a debtor should always contest an adversary case as vigorously as possible. The standard of proof to establish a non-dischargeability case is extremely high. Moreover, the amount of paperwork that must be produced to obtain a judgment of non-dischargeabililty is tremendously burdensome. Finally, even if a credit card company obtains a judgment that a debt is non-dischargable, then the creditor still must file another lawsuit to try to obtain a judgment and collect upon the debt. This is a significant amount of aggravation for a creditor, and most don’t follow through with these legal requirements.

Each of the credit card companies have their own criteria to assess whether to file an adversary proceeding. However, the following factors and circumstances are likely to increase the likelihood that your credit card debt may be contested;

a. An increase in any credit card use shortly before any filing;

b. A newly issued credit card;

c. There were large cash advances incurred months before filing;

d. The use of a credit card for recent travel or vacations;

e. The use of a credit card to pay for gambling expenses, or for cash advances at a casino;

f. A pattern of borrowing on one card to make payments on others;

g. Exceeding the credit limit;

h. The use of the credit card while the debtor was unemployed or used without a reasonable belief that the debt could be repaid;

i. A large balance at the time of the filing;

j. Generally, the longer the length of time between any particular charge and the bankruptcy filing, the less likely that the charge will trigger a challenge to dischargeability.

3. What type of options are available to a debtor to deal with potential adversary cases?

If you are concerned about a challenge by a credit card issuer to the discharge of a credit card debt, then there are several strategies available:

a. Wait to file bankruptcy so as to put more time and/or more payments on the account between the questionable usage and filing bankruptcy;

b. Settle the disputed credit card debt with the credit card company; and

c. Contest the adversary case at a trial. If you are successful in your defense, then you may be legally entitled to recover your attorney’s fees that were incurred to defend the case.

4. What are some of the factors that the court analyzes to determine if there was fraud involved with your credit card charges?

To decide whether a credit card charge was incurred by fraud, a bankruptcy judge sometimes uses a checklist of factors that suggest fraud, since there is seldom explicit evidence of dishonesty. Those factors that the court weighs to make its decision are;

a. The length of time between the charges and the bankruptcy filing;

b. Whether or not an attorney had been consulted concerning the filing of bankruptcy before the charges were made;

c. The number of charges made;

d. The amount of the charges;

e. The financial condition of the debtor at the time the charges were made;

f. Whether the charges were above the credit limit of the account;

g. Whether the debtor made multiple charges on the same day;

h. Whether or not the debtor was employed;

i. The debtor’s prospects;

j. Whether there was a sudden change in the debtor’s buying habits; and

k. Whether the purchases made were luxuries or necessities.

5. What if your last use of your credit cards was five months ago? Does that put you in the clear?

Unfortunately, the answer to this question is “not necessarily.” Bankruptcy Code Section 523 also allows credit card companies object to discharge if you incurred the credit card debt with no reasonable expectation of repayment.

For example, if you transferred your balance of $6,000 from one card to another eight months ago to get a better interest rate, the credit card company holding the balance may object to your attempt to discharge the debt in bankruptcy by arguing that at the time you made the balance transfers you knew or should have known that you would not be in a position to repay the debt.

6. I have to file for bankruptcy. What can I do to prevent the credit card companies from filing any adversary proceedings?

In the real world, many honest and hardworking debtors sometimes meet with their lawyers to discuss the needs to file bankruptcy even though they may feel guilty about recently abusing their credit cards. Here are some ideas about how to reduce the chances of receiving adversary complaints if you file for bankruptcy;

a. Create a history of making regular payments. Even if you only pay $25 or $50 a month, if you pay on a regular basis for two or three months prior to filing, then this course of conduct may help you avoid receiving an adversary complaint.

b. If you absolutely have to use a credit card, then it may be advisable to use one and concede that you will not get out of that debt, as opposed to risking non-dischargeability for several credit card accounts.

c. You should keep your receipts so you can prove that your use of the cards was for essential purchases.

d. If you have made any large purchases, then you may be able to return the items for a refund back to the card.

e. Often credit card companies will not object to dischargeability of your total balance is less than $10,000 or $15,000 – ask your lawyer about trends in your respective district.

Generally, you will improve your chances for a desirable bankruptcy result if you speak to a qualified bankruptcy lawyer as soon as you realize that your finances are in trouble.  You may discover that waiting a few months and following your lawyers pre-bankruptcy planning advice will serve you well.