If you are thinking about filing bankruptcy, you should stop charging purchases to your credit card as soon as possible. Credit card debts are usually discharged (wiped out) in bankruptcy with few issues. However, if you made a misrepresentation to get credit or are using the card without intending to pay for the items, this could cause trouble. It is considered bankruptcy fraud if you incur new debt knowing that you will file bankruptcy and will not pay off the debt. If a credit card company thinks you have committed fraud, they will ask the court to determine the debt non-dischargeable and that you pay them back in full.
If one of the items you purchased on your card is considered a luxury item or a cash advance, the court presumes the debt is non-dischargeable, meaning because of the timing and price, you did not intend to pay the debt back. The credit card company does not have to show anything except that you made a luxury purchase within the last 90-days and the debt cannot be discharged unless you show that it should. You may then rebut the presumption by providing facts to the court and state why the debt should be dischargeable. The Bankruptcy Code section 523 defines the amounts as the debt is owed to a single creditor exceeding $725 for the purchase of luxury goods or services in the last 90 days or is a cash advance from a credit line of more than $1000 and was made within the last 70 days.
What is a “luxury good”?
The Code states a luxury good IS NOT goods and services reasonably necessary for the support or maintenance of the debtor. Non-luxury items are necessities such as food, utilities, and gas purchases. Jewelry, plane tickets, and electronics have been considered luxury items under the bankruptcy code. However, a purchase of a new TV or cell phone is not always considered a luxury purchase. The court will also consider the circumstances surrounding the purchase, the price of the item, and whether it serves a significant family function before deciding it was a luxury purchase.
In G.E. Money Bank v. Youssef (In re In re Youssef), Nos. 05-17457, 06-05053, 2007 Bankr. LEXIS 2711, at *17 (Bankr. D. Kan. Aug. 14, 2007), the debtor purchased a stereo system and television for approximately $8,000 using a credit card. The court found that these were luxury goods primarily based on the price of the items. However, the inquiry doesn’t end here. The debtor may rebut the presumption by showing doubt as to the presumed intent. Courts have developed a number of factors to consider if the debtor had the intent to defraud the creditor. Typical factors are when the transactions were made, the number of charges on the card, the debtor’s financial condition when the charges were made, whether the debtor was employed, and changes in spending habits to name a few.
In this case the debtor stated that he made the purchases before he contacted a bankruptcy attorney and had planned to pay for the items from the sale of his restaurant. The court looked at other factors and found there were few charges on the card, his restaurant was operating as usual, and there was no change in his buying habits. Therefore, the court held that his debt for the stereo and television were dischargeable in his bankruptcy.
This provision does not usually affect low-income debtors because they have likely not purchased anything over $725 within the last 90-days on credit. If this situation does apply to you, speak with an attorney to go over your options before filing bankruptcy.
If you have any questions about this or any other bankruptcy topic please feel free to reach out to one of our bankruptcy attorneys. We have offices in Wichita, Topeka, Lawrence and Overland Park and offer free bankruptcy consultations.