When should you stop using credit cards if you're filing for bankruptcy?
Debt has become a major issue for Americans in today's economic landscape. Right now, borrowers are carrying a record $1.21 trillion in credit card debt, all while credit card rates hover above 22% on average. This has led millions of borrowers to struggle with paying even the minimums on their rapidly compounding credit card debt, leading many to consider filing for bankruptcy to get a fresh start. The path to filing isn't as straightforward as many assume, though, particularly when it comes to the plastic in your wallet.
Case in point? The timing of your last credit card purchase could help make or break your bankruptcy case. After all, bankruptcy trustees and courts scrutinize recent credit card activity with a fine-tooth comb, looking for signs of fraud or abuse. That means what seems like a harmless purchase today could be viewed as a fraudulent transaction tomorrow, and could even end up derailing your filing or landing you in legal trouble.
You don't want to find yourself stuck with debts that won't be discharged, facing objections from creditors or being accused of bankruptcy fraud. So, when exactly should you stop swiping your credit cards if you're planning to file for bankruptcy? That's what we'll outline below.
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When should you stop using credit cards if you're filing for bankruptcy?
If you're planning to pursue bankruptcy, the safest approach you can take is to stop using all credit cards at least 90 days before filing. This three-month window is critical because bankruptcy courts presume that charges made within 90 days of filing were incurred without the intent to repay them. And, any luxury purchases you make over $800 or cash advances you take exceeding $1,100 within this period are particularly vulnerable to challenges from creditors.
However, the 90-day rule isn't the full story here. Bankruptcy courts can and do look back further when examining your credit card history in certain cases. The credit card charges you made 90 to 180 days before filing can still be scrutinized, especially if they're substantial or appear frivolous. A pattern of unusual spending in the months leading up to bankruptcy can also raise red flags for trustees investigating potential fraud.
The type of charges you make also matters, sometimes significantly. For example, buying groceries or paying for medical expenses with a credit card is viewed differently from booking a vacation or purchasing expensive electronics. Courts understand that people facing financial hardship still need to meet basic living expenses, but discretionary spending suggests you're racking up debt with no intention of paying it back, which is a serious problem in bankruptcy proceedings.
So, if you're considering bankruptcy, your best bet is to immediately stop using your credit cards for any non-essential purchases. Continue making at least the minimum payments if possible, and don't add new charges if you can avoid it. This demonstrates good faith and shows you're not attempting to abuse the bankruptcy system. Even seemingly innocent purchases can be questioned if they occur too close to your filing date.
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What debt relief options should you consider as an alternative?
While bankruptcy can be the best (or only) option in certain cases, exploring the alternative debt relief strategies available to you is still important. Doing so can help you avoid the 90-day credit card conundrum altogether, and in many cases, these strategies may offer similar relief without the long-term repercussions of bankruptcy.
Debt consolidation, for example, will allow you to roll multiple credit card balances into a single fixed-rate loan and monthly payment, often with a lower interest rate than your credit cards. This can drastically lower the total interest you pay on what you borrowed, but the approach tends to work best for borrowers who still have decent credit scores and steady income.
Debt settlement, also known as debt forgiveness, offers another path, particularly for those who've already fallen behind. With this route, you typically work with a debt relief company to negotiate with creditors and settle balances for less than what's owed — often reducing your debt by 30% to 50%. The savings from successful settlements can be substantial, and the credit implications are typically less harsh, too.
Credit counseling can provide a middle ground, helping you create a manageable repayment plan without the severe credit impact of bankruptcy. These programs often secure reduced interest rates and fees from creditors and consolidate multiple payments into one monthly obligation. That can help streamline the repayment process while keeping you on track with your obligations.
The bottom line
Stopping credit card use at least 90 days before filing bankruptcy is essential if you want to avoid creditor objections, fraud accusations or an outright denial of your bankruptcy case. Recent charges, especially for non-essential items, can be challenged by creditors and may remain your responsibility even after bankruptcy discharge. So, if you're heading down this path, stop using your cards now and be sure to explore your debt relief alternatives before making any major financial decisions. The timing of your last swipe could determine whether you can actually achieve the fresh start you need.
