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Be careful using credit cards if thinking about bankruptcy

If you are a Tennessee resident struggling with credit card debt, you may be contemplating Chapter 7 bankruptcy as a last resort for discharging your debts and getting back on your financial feet.

While you are correct that a Chapter 7 bankruptcy discharges virtually all of your consumer debt, including your credit card debt, you should be very careful about continuing to charge things on your credit cards once you start thinking about filing bankruptcy. Section 523(a)(2)(C)(I) of the Bankruptcy Code contains a presumption against the discharge of any credit card debt you incur with a single creditor within 90 days of filing bankruptcy and use to purchase consumer goods worth $675 or more.

The Bankruptcy Court for the Northern District of West Virginia addressed this issue in a recent case where the debtor obtained an $8,000 cash advance on one of her credit cards only two months before filing for bankruptcy.

She purchased several consumer items with the funds. Not surprisingly, the bank that issued her credit card objected to the court's potential discharge of this $8,000 debt, citing the legal presumption in its argument against discharge. 

The court's decision

The court dismissed the bank's objection, holding that the code's presumption is exactly that, i.e., a presumption that a debtor can rebut via clear and convincing evidence.

Here the debtor successfully rebutted the presumption. She provided receipts showing that while the purchases she made with the $8,000 cash advance clearly totaled more than $675, the items she purchased were household goods and products such as consumers normally buy.

She likewise testified as to her state of mind when she took the cash advance, stating that she had fully intended to pay the money back at the time she obtained it. The court believed her testimony and held that she committed no trickery and/or fraud when she obtained the cash advance, even though she filed bankruptcy two months later.

Lessons learned

Regardless of this court's ruling in favor of this particular Chapter 7 debtor, you may want to think twice about using any of your credit cards now that you have begun thinking about bankruptcy.

As your attorney will be quick to tell you, one court's decision does not necessarily mean that all courts will decide the same way in the future. Your best strategy is to stop using your credit cards if there is any possibility that you will file Chapter 7 bankruptcy in the next 90 days.

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