If you are awash in debt and find yourself living on your credit cards because your employer reduced your hours or laid you off, you know you are in a downward spiral that likely will not end. In fact, you may arrive at the point where bankruptcy becomes your only viable option.
You may have heard that Chapter 7 bankruptcy discharges your consumer credit debts, including your credit card debts, thereby relieving you of the responsibility to pay them. In general, this is true, but you need to be aware of a little-known provision of the Bankruptcy Code that denies credit card discharges in some situations.
Presumptions against discharge
Section 523(a)(2)(C)(i)(I) sets forth a presumption against discharge of any consumer debt, including a credit card debt, you undertake within 90 days of filing bankruptcy. This debt must be for “luxury goods or services” totaling over $500 and owed to a single creditor. Section 523(a)(2)(C)(ii)(II) excludes “goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor” from its definition of luxury goods or services.
Section 523(a)(2)(C)(i)(II) sets forth a second presumption against discharge of any cash advance or advances you take on your credit cards within 70 days of filing bankruptcy that total $750 or more.
Practical effect
In other words, if you use your credit cards any time within three months before you file bankruptcy, the Bankruptcy Court may not discharge these debts.
Keep in mind, however, that these presumptions are exactly that: legal presumptions. They are not facts written in stone. A legal presumption is a conclusion the law allows a court to make based on the facts of the case before it. Most legal presumptions, including these two, are rebuttable, meaning that the court will not apply them if you can produce sufficient credible evidence to prove that they do not apply to you and your situation.
Nevertheless, once you begin thinking about filing bankruptcy, your wisest course of action is not to use your credit cards if at all possible.