In short, it is a terrible idea to run up your credit cards before filing for bankruptcy. In theory, it may seem to make sense if you are planning to declare bankruptcy for other reasons, but it is wrong on a number of levels. It also may come back to haunt you.
Bankruptcy is meant to help honest people get back on their feet. This may include liquidating assets for payment or a complete discharge of debts. The process of bankruptcy is not intended to encourage individuals to abuse or take advantage of the system, such as building up credit card debt to have it purposely discharged.
How many types of bankruptcy are there?
Some people think that there is only one type of bankruptcy.
Truth is there are six fundamental kinds of bankruptcy. Some are for individuals and others are meant for businesses. Each type defines what exactly happens to the debt and debtor.
Chapter 7 Bankruptcy, for example, outlines that assets are liquidated in order to provide cash to pay off the creditors. If you do not have any assets, you will be discharged from your debts as long as there is not an objection or argument from one of the creditors.
Chapter 13 Bankruptcy, on the other hand, allows you to keep your assets and outlines a repayment plan. This type is more suited for those individuals with a number of assets and a regular income.
For a complete list and explanation of each bankruptcy type, go to the website of the United States Courts.
Who should file for bankruptcy?
Bankruptcy is an unfortunate thing, and yet it is beneficial at times when an individual has nowhere left to turn. If you are debating whether to file for bankruptcy, you should do a lot of research and make sure that there are no other options because bankruptcy affects you for years afterwards.
Everyone’s situation is different but there are some general guidelines to follow when thinking about bankruptcy. One is to determine whether the debts can be paid back in three to five years. Another is that a reduction in debt is nearly impossible for one reason or another.
If you lose your job and are considering taking funds out of a retirement account, you may want to think about bankruptcy. Another time you may consider bankruptcy is if your mortgage payments suddenly balloon and you are no longer able to keep up with payments.
Again, each situation is different. To determine whether to file, you should meet with a counselor and go through a session for pre-bankruptcy counseling. Information can be found at the website for PreBankruptcy Counseling.
Why can’t you run up debt on your credit cards before filing?
If you have determined that you are going to file for bankruptcy and are thinking you will use your credit cards to their limit because the debt will be discharged, think again. There are a number of reasons not to do this.
Bottom line is that purposely creating debt to eventually be discharged is considered fraud. It goes against everything that bankruptcy is in place for. It makes things more expensive and difficult for the honest person who has done everything they can and have no other option but to file.
Another reason not to do it is that the debt may end up being denied discharge. Each creditor has the option of contesting your request for discharge. If it can be proven that you were fraudulent, you will end up being responsible for the credit card debt. It may even result in having your whole case denied.
Creditors often look at your past spending history.
If it shows that you had a bunch of increased activity on the card recently, that is a red flag and will more than likely be contested. Also, keep in mind that if you make any charges within 90 days before you file, most courts will deem them non-dischargeable and you will end up having to pay for them anyways.
Being fraudulent in terms of bankruptcy has a number of consequences. It affects the honest person, the bankruptcy court itself, the creditors, and lastly the person who is committing the fraud. It is always best to be honest.
- Chapter 7 Bankruptcy
- Is learning how to pay off credit cards important?
- Are Debt Management/Debt Settlement/Debt Counseling/Consumer Credit Counseling/etc./etc. Services a Scam?
- What can I do if I’m having problems paying credit cards?
- Are credit cards a secured debt?
- Can you apply for credit cards while in bankruptcy?
- Debt Management Plan (DMP)