This time of the year, everyone is busy preparing for the holidays. Along with the holidays comes . . . shopping! Now, hopefully, holiday shopping for you means moderation and not over-extending yourself. After all, the true meaning of the holidays has very, very little to do with giving presents. But, let’s be real, you’re going to have to buy at least a few presents over the next month or so. The question then becomes “What if I need to file for bankruptcy shortly after the holidays and I used my credit cards or a cash advance to buy Christmas gifts?” If you find yourself in need of bankruptcy relief, but are worried about recent charges to your credit cards or taking a cash advance or a payday loan, the good news is that there are laws that give you a clear answer to whether you’ll have a problem.
11 USC Section 523a(2)(c)(i) is a section of the Bankruptcy Code that deals with this very issue – well, not necessarily holiday spending, but charging up a credit card or taking a cash advance or getting a new loan right before filing your bankruptcy. First, understand that we are now talking about “unsecured” debts, or debts where no collateral is pledged against the loan. So, for say a car loan, these rules in 523a(2)(C)(i) don’t apply. But, for those credit card debts, the law can be summarized as follows:
Debts for luxury goods purchases and cash advances, whether on a credit card or a “signature loan,” can be non-dis-chargeable. Luxury goods purchases incurred in the 90 days prior to filing and totaling $675 or more for one creditor are not dis-chargeable. Cash advances totaling more than $950 obtained within 70 days before filing are not dis-chargeable.
So, there are a couple of tripwires for credit card purchases: the nature of the purchases (luxury goods and cash advances) and dollar amounts ($675 for goods and $950 for cash). Let’s say you go Christmas shopping at the local discount store. You charge $700 on one credit card buying what we would term as “practical” gifts for your family: inexpensive clothing, school supplies, maybe some health and fitness items like a jump rope, electronic scale, an electronic blood pressure monitor for grandpa, maybe some shoes or boots. You’ve hit the first tripwire in exceeding $675 in charges on one card. But, those items won’t be considered “luxury items”. So, you’re going to be safe from an objection on this law. On the other hand, visit your local high-end department store (think “Nordstrom’s”), and those same items are probably going to get you in trouble, simply because the credit card statement is going to show that you were shopping at a luxury department store. However, instead of spending $700 at Nordstrom’s, let’s say you only spent $650 there. The total amount of the purchases does not meet the threshold of $675, so you’ll be OK. Now, keep in mind also that we are looking at the entire 90 day period prior to filing your case. So, you aren’t completely safe by stopping at $650 in your Nordstrom trip. If you go out to dinner a week later and charge on that same credit card $30 at a restaurant, you’re putting yourself over the limit for luxury goods purchases because the court will likely view your dinner out as a luxury item.
Even if your don’t run afoul of the rules in 523a(2)(C)(i), these types of debts can also result in an objection to your case even if incurred more than 90 days prior to filing if the debts are for a large amount. However, it is much more difficult for a creditor to prevail under those circumstances. In any case, the creditor may accept a settlement or may elect to take this issue before the Court in a trial. The best rule of thumb is to limit or eliminate altogether, credit card spending and cash borrowing in the months leading up to filing a bankruptcy.