Credit card debt is a common concern for consumers — the average American household owes more than $7,000 on their credit cards. For indebted households, that number rises to more than $15,000. Credit card debt carries interest rates in the range of 30%, making it difficult to ever repay what you owe. Filing for bankruptcy can help you wipe out your credit card debt.
The Bankruptcy Process
When you file for bankruptcy, you get the protection of the automatic stay. The automatic stay halts all collection attempts, including lawsuits, wage garnishment, foreclosures, and repossessions. It lasts for the duration of the bankruptcy and is meant to give you time to get your finances in order.
Consumers generally file under either Chapter 7 or Chapter 13. Under Chapter 7, you turn over your nonexempt assets to the bankruptcy trustee. The trustee sells these assets and pays the proceeds toward your unsecured debt. California offers two different sets of exemptions; most filers can protect all of their property using these exemptions. Under Chapter 13, you’ll work out a payment plan that takes into account your income and expenses. At the end of either process, your remaining unsecured debt is discharged – that means it’s forgiven and it goes away forever. Most filers pay pennies on the dollar for their unsecured debts – and most unsecured debts are medical and credit card debts.
Credit Card Companies May Challenge a Bankruptcy
Because filers generally pay so little of their debt in bankruptcy, credit card issuers may challenge the discharge through an adversary proceeding. The basis of the legal claim is that the debt was incurred by fraud and so should be excluded from discharge. 11 U.S.C.A. § 523(a)(2). This is sometimes called a “non-dischargeability action.”
Credit card issuers can win this non-dischargeability action under one of two legal theories. First, they may claim that the application you submitted to get the card in the first place was fraudulent. Second, and much more commonly, they may claim that you used the card to rack up debt without any intention of repaying it. Creditors can make these claims against both Chapter 7 filers and Chapter 13 filers.
How Creditors Can Win
For the first type of claim, the credit card issuer can use your financial documents to prove that you lied, or left out important information, on your application. For the second type of claim, evidence is more difficult to find. It’s impossible for the court to find out what you were actually thinking when you got a credit card and made purchases, so it will look at circumstantial evidence that you acted fraudulently. For the court to deny your discharge, the credit card issuer must show that you used the card without intending to repay the debt.
For example, if you make a lot of large purchases immediately before you file for bankruptcy, it may look to the court like you never intended to repay the debt. The court may be suspicious if you take out a brand new card, make purchases, and file for bankruptcy shortly thereafter. Using the credit card for luxury goods or travel is another indicator of fraud – the court will assume that you knew you couldn’t repay the cost of those things. Taking out large cash advances shortly before filing is also suspicious.
In addition to these specific types of uses, the court will examine your general financial behavior. Borrowing on one card to pay off another, regularly exceeding your credit limit, using your card when you’re unemployed, and filing when you have a large outstanding balance can all indicate that you didn’t intend to repay the debt.
Your credit card issuer may choose to challenge the dischargeability of specific charges, rather than the whole balance.
How Can I Avoid Creditor Challenges?
First, there is no rule about how long you will have to wait after making large purchases. In general, however, the longer the time between using the card and filing for bankruptcy, the better. If you use the card when you’re in financial distress, the court may decide that you knew you wouldn’t be able to repay it. Try to avoid using your card for at least 90 days before filing for bankruptcy.
If a creditor does challenge your discharge, you may be able to settle with the credit issuer out of court. Lawsuits are expensive and time-consuming and the credit card issuer doesn’t want to go through the hassle of a trial any more than you do. If the suit goes to trial, you can still win. Bring documentation showing that you thought you would be able to repay the debt.
If you’re struggling with credit card debt or other kinds of debt, reach out to one of our experienced bankruptcy attorneys. In a free consultation, we’ll discuss your circumstances, your goals, and your options. The best way to win a lawsuit is to not have one filed against you. Experienced attorneys can assist in avoiding the lawsuit all together.