If you are contemplating filing bankruptcy and have credit cards, please consider the following:
- Don’t pay off your credit card balances before filing. Credit card debt is typically dischargeable in bankruptcy provided you don’t take cash advances or purchase luxury goods before filing for bankruptcy relief. It does not make sense to pay off debt that you can discharge in bankruptcy. Also, you may be creating “preferential” payments to the credit card company that your bankruptcy trustee can recoup.
- Stop using your credit card before filing. After you file for bankruptcy, you will not be able to use your credit card, so it’s a good idea to start getting used to living off of cash. Additionally, the purchase of luxury goods and services within 90 days of filing bankruptcy can be the basis of the credit card company bringing a nondischargeability action against you. While the Bankruptcy Code does not define what a “luxury” good is, it is generally a bad idea to use your credit card to purchase items like vacations, recreational vehicles, or expensive clothing. Purchases such as food, medicine, and gas which are more essential are likely not to be considered “luxury” purchases. Additionally, taking cash advances within 70 days of filing bankruptcy can also be the basis of a nondischargeability action by the credit card company. If possible, avoid credit card use before filing bankruptcy except in emergency situations.