If you are in financial difficulty, chances are that you have been depending on credit to meet your ordinary living expenses. You probably already know that once you file bankruptcy, you may not continue using your credit cards.
But what about recent charges?
Credit obtained by fraud is not dischargeable. If a creditor alleges fraud, the creditor must file an adversary proceeding and provide evidence to prove it. Generally speaking, this means proving that the debts were incurred with no intent to repay them. Although the creditor has the burden of proof, a mere declaration of an intent to repay is not a defense. The question is whether there was a reasonable expectation of the ability to repay. In making this determination, factors to be taken into account include, whether new credit cards were obtained, whether the credit application contained false information, whether there were large cash advances, purchase of luxury items, whether the amounts, times, places and types of charges varied from past patterns, how much was charged, when and what for, whether the debtor was employed or otherwise able to pay, and whether the debtor has recently consulted with a bankruptcy attorney.
While the burden is generally on the creditor to prove fraud, certain transactions create a presumption of fraud, thereby putting the burden on the debtor to prove otherwise. These transactions include debts to a single creditor for luxury goods and services incurred within 90 days of filing totaling more than $600 and cash advances totaling more than $875 incurred within 70 days of filing. (These numbers are changed periodically.)
Keep in mind that this does not mean that smaller transactions will avoid scrutiny, nor that you can avoid trouble if you wait more than the specified number of days. Creditors (and the trustee) are likely to carefully review any recent credit card transaction, transfer of assets or debt obligation.
Lenders will also look at your credit applications. If you misrepresented your income (claiming, for example, an annual income of $125,000 when you actually earned $45,000 at that time) would be considered a fraudulent misrepresentation and could result in a denial of dischargeability of a debt, or even a dismissal of your case due to fraud.
If you are contemplating bankruptcy, the first thing you need to do is to stop using your credit cards. If this seems impossible (it’s not). If bankruptcy is a possible source of relief for you, your bankruptcy attorney can help you develop a plan to avoid the appearance of fraud.