Bankruptcy and Using Credit Cards

March 10, 2011

By: David M. Serafin

I have mixed feelings about the exponentially increased use of credit cards over the past couple of decades. On one hand, credit cards are easy to use and can be used to provide a source of borrowed funds for those otherwise unable to afford many of life’s necessities. A credit card is also necessary to book a flight or rent a car. But, this is exactly the same reason why credit cards are so dangerous to our health. Even debtors “doing the right thing” by using credit cards to purchase food, clothing and other necessities of life, can find themselves on the brink of bankruptcy due to falling behind and subsequently incurring excessive interest and late charges (this is how credit card companies make a bulk of their profits).

When bankruptcy in Colorado is contemplated, it is critical to analyze when credit card usage is appropriate. You should immediately stop paying down credit card debt if you intend to file for bankruptcy because this debt will discharged anyways. Additionally, a credit card company (or its collection agent) may file an Objection to Discharge (for that particular debt, not the entire case) if you either spent over $600 on luxury items within 90 days prior to filing or took out a cash advance of $875 or more for luxury items 70 days or less before bankruptcy is filed. “Luxury goods” typically does not include expenditures for food, clothing, fuel, medical treatment or another immediate necessity but almost certainly includes a vacation or trip to Best Buy.

Although the Bankruptcy Code presumes all credit card debt to be dischargeable thereby requiring the creditor to prove improper usage, the likelihood of an objection depends on the amount charged, how close in time the charge is to the date of the bankruptcy filing, and the cost to the creditor of retaining counsel to both object and prepare to litigate in Colorado Bankruptcy Court.

Many bankruptcy clients also wish to keep a credit card post-bankruptcy if able to agree with the creditor to voluntarily to this debt back (even though otherwise discharged). But, in today’s restrictive lending environment, rare is the case where a bankruptcy debtor can keep a credit card active post-bankruptcy. And the exception is being offered a credit card with a very high interest rate (which may lead to bankruptcy again in the worst cases). A better alternative is a secured credit card (secured by funds held in a bank account as collateral to prevent against default) or a debit card.