Will Chapter 7 discharge your recent credit card debt?

Posted by Angelique CooperMay 29, 20190 Comments

If you are an Alabama resident who has begun thinking about bankruptcy as the way to relieve you of your crushing consumer debt, you may also be thinking about running up your credit card balances before filing bankruptcy, knowing that Chapter 7 discharges virtually all of your consumer debt, including your credit card debt.

Before you engage in such ill-advised activity, however, you should know that the Bankruptcy Court may well not discharge these debts. Why? Because as Bloomberg News reported, Section 513(a)(2)(C)(1) of the Bankruptcy Code contains a little known presumption against the discharge of any credit card debt you assume within three months of your filing date and with which you purchase consumer goods totaling $675 or more.

Recent Bankruptcy Court Decision

This precise issue recently came before the Bankruptcy Court for the Northern District of West Virginia. In that case the Chapter 7 debtor took an $8,000 cash advance on one of her credit cards only two months prior to her filing date. Not surprisingly, the bank that issued the credit card petitioned the Court, asking it to refrain from discharging this debt based on the Code's presumption.

Fortunately for this particular debtor, the Court overruled the bank's petition and allowed the discharge to take place. Why? Because the Court noted that while the presumption normally precludes the discharge of such recent credit card debt, the debtor can rebut the presumption by a showing of clear and convincing evidence as to why it should not apply to him or her.

In this case, the debtor presented the requisite evidence. First she testified that she never intended to defraud the bank when she obtained the cash advance; in fact, she fully intended to repay this debt despite the fact that she instead filed for bankruptcy two months later. She also presented receipts to the Court verifying the things she bought with the $8,000. The Court not only believed her testimony but also ruled that the purchases she made, while clearly totaling over $675, nevertheless represented common household goods that virtually everyone buys with his/her credit card.

Moral of the story

While you probably realize that the Bankruptcy Court for the Northern District of West Virginia has no jurisdiction over Alabama's Bankruptcy Courts, you also should seriously consider that should you run up your credit card balances prior to filing bankruptcy, your decision may well come back to haunt you when the Court refuses to discharge such debt.

This is general educational information and not intended to provide legal advice.