Avoid Credit Card Advances And Payday Loans When Filing Bankruptcy

by

Rebecca A. Smith

When faced with the reality of a pending bankruptcy, people experience a variety of emotional reactions, including embarrassment, fear, and stress. After years of financial hardship, a bankruptcy is often a necessary form of relief. At times, a payday loan becomes a source of relief for some as well. however, many people who face bankruptcy essentially throw in the towel on maintaining healthy spending and credit habits, maxing out credit cards in anticipation of the upcoming erasure of debt. While not the most ethical thing to do, it is an understandable reaction.

Many people who file bankruptcy have been subsisting on tight budgets for years; thus, when the floodgates are opened and accountability is removed, many go wild racking up debt with the knowledge that they will never have to pay it back. Similarly, the knowledge that one\’s credit options post-bankruptcy will be extremely limited often leads people to take out payday loans and charge up credit cards, considering that such a luxury may soon be null and void.

At this point in financial collapse, many people will reason that they might as well take advantage of their cards while they have them. Yet, this attitude is detrimental to the case filer for a variety of reasons.

First, bankruptcy courts are not likely to forgive recent credit card use when processing a case. The only exception to this is credit card use for essential expenses, such as groceries and utilities. Using your credit cards for nonessential purchases in the months preceding bankruptcy might jeopardize the chance of a successful case. If a bankruptcy is refused, you will likely be faced with unpaid credit cards and other bills, as well as the newly acquired debt. Additionally, you may be out the money you paid to file the case, causing even more financial hardship. While going on a shopping spree in anticipation of bankruptcy might sound like a good idea, it is really far more risky than it is worth.

This is particularly true for luxury items. The law does not allow the discharge of luxury items purchased within 90 days of filing for bankruptcy. Thus, you will likely be responsible to pay for the $ 1,000 Chanel bag you bought once the bankruptcy is processed.

Dispatching credit card cash advance debt is even more challenging. Bankruptcy law will not allow judges to discharge credit debt in excess of 750 dollars that was accrued via cash advances within 70 days of the bankruptcy. Thus, if you rack up credit card cash advance debt in the months before filing bankruptcy, then you will be stuck with the bill post-bankruptcy, despite the fact that you will not have as much credit access.

Furthermore, cultivating bad spending habits is no way to reinstate your financial health. After a bankruptcy, one must practice self-control and budgeting to get back into the good graces of creditors. Giving into temptation prior to a bankruptcy may encourage bad habits that are hard to kick once the case is processed. By getting used to excess directly before you file a bankruptcy, you are setting yourself up for disappointment once the realities of post-BK life set in.

Lastly, bankruptcies are meant to help those who are struggling; taking advantage of these services is harmful to the country as a whole. Going on a spending spree when one is aware of a pending bankruptcy is not only dishonest, but it costs tax-payers a great deal of money. Additionally, if caught, your case may be thrown out and you may face criminal charges of fraud. It simply isn\’t worth it. Responsible lenders feel the same way about a payday loan in that it is something that shouldn\’t be taken out frivolously.

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