Featured News 2012 Don’t Run up Your Credit When Filing for Bankruptcy

Don’t Run up Your Credit When Filing for Bankruptcy

So, you are going to file for bankruptcy. Maybe you already spoke with your attorney and are set to go, but have not filed yet. Some people may think that they should buy up all the items they've always wanted right away, before their credit will be discharged through the bankruptcy process. Essentially, these people assume they can get free stuff because the bankruptcy will eliminate all of their debt. While this may sound like a good way to get the goods you've always wanted, lawyers don't recommend it. It is not a smart idea to run up your credit before filing for bankruptcy.

If you incur a debt under false pretenses, then it will not be dischargeable when you file. This means, for example, that if you purchase a ski boat right before you file, then that ski boat will not be eligible for a discharge. You will be stuck with another debt that you can't afford to pay, because the boat was obtained under false pretenses. False pretenses are defined as any debt that you didn't intend to pay. In order to prove that you obtained a debt under these devious circumstances, your creditor will need to prove that you never intended to pay back the sum. This is usually hard for them to do, but some creditors will fight down to the wire if they deem it necessary.

In many states, this bankruptcy law gets even more specific, to help clarify any confusion. Purchases that are greater than $550 and are made on a credit card for a luxury good or service within 90 days before filing for bankruptcy can be considered non-dischargeable. For example, this would mean that a $600 weekend spa getaway that was purchased on credit will only be considered dischargeable if you can explain that the vacation was necessary for the health and welfare of you and your family.

A viable purchase may be one that was made because you needed a special treatment at a spa for a medical condition. An illegitimate purchase would be one that was solely for enjoyment. If you buy your family tickets to Disneyland for a fun family getaway, chances are that the debt will not be discharged on your bankruptcy. The term "luxury goods and services" is relevant. The law determines that "any goods or services that are necessary for support or maintenance of the debtor or a dependent of the debtor" may be dischargeable if the court determines that they are. You will have to present a strong argument to prove that the goods and services you acquired within 90 days prior to bankruptcy were essential. Purchases like diapers, food, or gasoline may be legitimate. Also, if you need medicine or a medical treatment during this time, the court may recognize that this purchase was unavoidable.

Admittedly, it is best to avoid spending any money on your credit card prior to a bankruptcy. This will save confusion in the court room and help you to learn how to live while just spending cash. Once you file for bankruptcy, you won't be able to use your credit cards anyway. You will need to apportion your cash out to pay any expenses that arise. Why not start practicing now? Cut up your credit cards and try living off of cash to see how well you can manage your money. If you can carefully learn to budget your finances, you may be able to build up your credit and have a new credit card in no time. Still, you will want to pay off your purchases in a timely fashion so that you don't fall back into a financial slump later on.

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