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How are recent credit charges treated in bankruptcy?

Greater scrutiny by court may occur on recent charges before bankruptcy

Charges to credit cards made shortly before a bankruptcy filing may prompt the U.S. Bankruptcy Court to take a more aggressive look into a debtor's financial history.

When such expenses occur, it may be reason enough for the court to presume fraud on the part of the debtor, and to examine the individual's finances for up to five years before the petition was filed. If the charges are considered fraudulent, they will be omitted from the bankruptcy and the creditors will have to be paid those amounts.

According to the U.S. Bankruptcy Code, an individual may not charge more than $550 to a credit card for items that are considered luxury - or "non-essential" - goods or services within the 90 days prior to the court filing. Charges made for essential items such as emergency car repairs are not usually considered violations.

In addition, no more than $825 may be taken out in cash advances from credit cards for any purpose within the 70-day period before filing. Legal experts often refer to the prohibition of these actions as the "70/90 rule."

Conditions considered in court

In considering whether fraud has taken place, court officials may consider conditions such as the number of charges made and how close to the filing these took place. They may also review multiple charges made on the same day or if the purchases were made above the credit limit of the account.

"First and foremost, if you are considering bankruptcy, then stop digging the hole deeper," advises Missouri bankruptcy attorney Wendell Sherk on Bankruptcy Law Network. "Stop using [credit cards] and try to live off your existing income, even if that ultimately means you can’t make the credit card payments."

Before the 70/90 period, creditors must prove that debtors knew they were planning to file bankruptcy when they made credit purchases or took cash advances. Los Angeles attorney Leon Bayer warns those filing bankruptcy that claims of fraud can be attached to any credit charges made by the debtor, if a creditor is determined to stop them from being discharged in bankruptcy.

"It doesn't stop a creditor from seeking nondischargeability on charges that were made a lot earlier than that, where the evidence indicates there was use of credit under fraudulent circumstances," he writes for All Experts. "Don't think that waiting 90 days puts you in the clear. The only difference is a shift on who has the burden of proof at trial."

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