Can I run up my credit cards before filing bankruptcy?

Chapter 7 Bankruptcy will often wipe out your credit card debt. But people who are looking to file bankruptcy are often still living off their credit cards, or at least using them on a regular basis. So our clients ask us, "can we use our credit cards before filing bankruptcy?" There are a couple of basic rules to follow:

1. Don't buy a jet ski on your credit card right before your bankruptcy. The bankruptcy law says a debt is non-dischargeable (meaning that it won't be wiped out in bankruptcy) if the debt was incurred under false pretenses. False pretenses may include the fact that you didn't intend to pay the debt when you incurred it. But the creditor will have to prove that you didn't intend to pay the debt, which is usually an uphill battle for them.

This is why the law gets more specific. Purchases greater than $550 made on a credit card for luxury goods and services within the 90 days before filing are presumed to be non-dischargeable—meaning that to get them discharged, you'll have to prove that the jet ski was necessary for the health and welfare of you or your family. That'd have to be one special jet ski.

2. OK, so you can't buy a jet ski, but you can probably buy diapers. "Luxury goods and services" isn't defined in the bankruptcy code, but the law does say that the term doesn't include "goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor." So although I can't promise you a judge will think your particular purchases were necessary, I'd guess you'd be able to make a strong argument that food, medicine, diapers, or gas station purchases would normally pass the test.

3. Don't take large cash advances right before your bankruptcy either. Cash advances more than $825 from a single creditor within 70 days before filing bankruptcy are presumed nondischargeable. Which brings up an important point. If you try to avoid the presumption limits (such as taking $824 in cash advances 71 days before filing your bankruptcy case) the creditor can still try to prove false pretenses generally, and if you're trying to skirt the presumptions, it may look like you're hiding something and attract unwanted attention from your creditors and the court.

4. Once you file bankruptcy, you won't be able to use your credit cards. So why not start living on cash right now? We usually recommend that our clients cut up their credit cards and see if they can make their monthly expenses for roughly three months before the bankruptcy. Living without credit can be hard after you've become accustomed to it, so it makes sense to get some practice before you file bankruptcy.

Questions about non-dischargeability? Don't make these decisions without an experienced attorney.