Credit Cards and Bankruptcy
Credit cards transactions represent a $160 billion industry, and many critical aspects are regulated by the fine print agreements you probably have not read. To credit card companies, it’s not sufficient that customers monthly pay their bills on time. Customers must avoid a variety of borrowing habits that lenders consider risky. And borrowing may be one of those habits. The interest rate may jump to 29.99% or higher from previous 11.99% or so, even if customer has never missed a payment and owed only $600, the rate usually increases because the issuing bank regularly checks customer’s credit report.
Most consumers are unaware that the banks constantly monitor their borrowing behavior. Even if you simply get close to your borrowing limit (a figure majority credit card holders probably don’t know) on your cards, this action is sufficient trigger for your interest to go up. It has all been disclosed to you in the fine print.
Credit cards make majority of their profits not from the lending practices, but from various transaction fees.
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The balances due on credit cards typically represent so-called “unsecured” debts. This means that the borrower has not put up any collateral for the debt, as same borrower would for a car loan or a home mortgage. For the most part, credit card debt can be discharged in bankruptcy, as long as the purchases were not made fraudulently.
However, some credit cards may be “secured” because the purchased items themselves are considered as collateral. For example, a furniture store may issue “secured” credit cards for purchases made at the store. If a customer buys a dining room set at the store and puts the purchase on his “store” credit card, that dining room set would most likely have to be returned to the store in the event that the customer files for bankruptcy.
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A debtor who is contemplating filing for bankruptcy should be aware that bankruptcy trustees have the power to object to the dischargeability of credit card debts incurred shortly before the petition was filed. A trustee may believe that the credit card debts were fraudulently incurred because the debtor planned to file for bankruptcy and hoped to avoid repaying the credit card debt.
Being creditors in bankruptcy, credit card companies can challenge the dischargeability of certain credit card debts. Procedurally, while believing that the debtor filed a fraudulent application (made the purchases with no intent of repayment), the creditor may file an “adversary proceeding” or a “non-dischargeability action.” Some of the fraud determination factors that a bankruptcy court may consider in allowing a credit card debt discharge, including a cash advance:
The length of time between the purchases and the bankruptcy filing
A change in the debtor’s purchasing habits, i.e., a sudden increase in usage
The total number of credit card purchases made by the debtor
The amount of the charges
Whether the credit limit was exceeded
Whether items charged were necessities or luxuries
How long the debtor held the credit card, etc.
If a bankruptcy court determines that certain credit card purchase may have been made fraudulently, the court may decide that the debt cannot be included among the dischargeable debts. Courts often look with disfavor upon cash advances made shortly before filing. Generally, the closer in time to the filing of a bankruptcy petition, the less likely that a credit card purchase will be discharged in bankruptcy. A debtor who has filed a petition in bankruptcy certainly should not continue to incur credit card debt.
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A co-borrower may have signed a credit card application for the primary account holder, who subsequently files for bankruptcy. The co-borrower is responsible for the credit card debt in such situations. Again, this only applies when “co-borrower” knowingly executed the application or otherwise took responsibility before the credit card issuing bank.
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After considering the balance due and the debtor’s ability to repay, a credit card company may allow a bankruptcy debtor to keep that card is a debtor decides to keep a credit card debt. Of course, a debtor who decides not to get rid of a dischargeable debt will be responsible for repayment. The debtor therefore “reaffirms” that debt to the credit card company by promising to repay the debt instead of discharging it.