It seems like a perfect plan. If a consumer is about to declare bankruptcy to discharge all or most of his or her debts, why wouldn’t that consumer try to increase his or her credit card debt as much as possible to maximize the benefit granted by bankruptcy protection? The answer is simple. It won’t work.
Generally speaking, credit card debts are dischargeable in bankruptcy. However, a bankruptcy trustee examines a consumers spending in the months leading up to a bankruptcy petition. If excessive amounts are charged to a credit card prior to the claim being filed, the credit card company may file an adverse proceeding challenging the bankruptcy petition and preventing the debt from being discharged. If luxury items were purchased, or items not necessary for the support and maintenance of the debtor, those charges might not be discharged. Examples of items that might be considered luxury purchases by the court include vacations, expensive clothing or cosmetics, additional vehicles, household furnishings, jewelry, artwork, magazine subscriptions, cameras, and computers. Any charge of more than $650.00 will set off red flags, both with the bankruptcy trustee and the creditor.
If cash advances were taken out in the months immediately preceding the petition, the creditor may sue the consumer for fraud. If the cash advance is for more than $925.00, there is a presumption that the debt is not dischargeable. If a consumer makes payments on the debt prior to declaring bankruptcy, it can help to demonstrate that he or she had intended to repay the debt. Showing that an unexpected life event occurred making the bankruptcy unavoidable can also help a creditor to prove that he or she had no intention to defraud creditors.
If a consumer makes expensive purchases immediately before declaring bankruptcy, it is counter-productive. The debts will not be discharged, meaning that the consumer will still be in debt, even after having completed all the requirements of the Bankruptcy Court. The goods and services purchased will not be worth the debt that remains after the bankruptcy is completed effectively ruining the consumer’s credit without a benefit. The entire Bankruptcy Petition might be dismissed for the attempted fraud. Participating in suspicious spending that might provoke a challenge from a creditor is a bad idea. As inviting as it might seem to load up on debt before seeking a discharge, the system is designed to prevent consumers from doing so.