Very recent credit card purchases and cash advances can be a problem when filing bankruptcy. Smart timing can mostly solve this problem.
Last week’s blog post introduced the so-called “presumptions of fraud” in bankruptcy. Today we get into dealing with this issue through smart bankruptcy timing.
Bankruptcy Timing to Avoid the Presumption of Fraud
Here’s the key point: you greatly increase the risk that you’ll still have to pay a credit card debt if you file bankruptcy too soon after incurring that debt. You risk still having to pay the purchase(s) and/or cash advance(s) recently incurred. You may still have to pay that part of that credit card debt in spite of bankruptcy.
But you can avoid much of that risk by timing your bankruptcy right. The presumptions of fraud are in effect for only a relatively short period of time after you make the purchase or cash advance. You avoid the presumption of fraud simply by filing bankruptcy after that short period of time has passed.
The Presumption Period for Credit Card Purchases
The presumption period of time for purchases is 90 days from the time of each purchase. It only applies if the purchase(s) made within that 90-day period exceed(s) $725. (U.S Bankruptcy Code Section 523(a)(2)(C)(i)(I), with that $725 dollar amount valid from 4/1/19 through 3/31/21.)
So what happens if you file bankruptcy within 90 day after making a large enough credit card purchase(s)?
Maybe nothing bad would happen. The creditor may not challenge the discharge (legal write-off) of the debt on that purchase. Then bankruptcy would discharge that debt regardless when you made that purchase.
Or the creditor could challenge the discharge of that recently incurred portion of the debt. It could assert that you made the purchase within the 90-day presumption period before filing. The creditor could make this challenge in one of two ways.
First, it could contact your bankruptcy lawyer about its intent to raise this challenge. Or second, the credit card creditor could make the challenge directly in bankruptcy court. It would have its lawyer file a narrowly-focused legal proceeding asking that the debt not be discharged.
Your Response with Contrary Evidence
Either way, then you’d have a chance to push back. Just because your purchase(s) fall within the 90-day presumption period does not necessarily mean you’ll have to pay the debt. Remember that the whole debt is usually not at issue, only the purchase(s) made during the 90-day presumption period.
Beyond that, the presumption is just that and no more. It’s an initial presumption that you did not intend to pay the debt when you made the purchase. When you incur a debt you are promising to pay it. If you incur that debt without intending to pay it, the law treats that as a fraudulent misrepresentation. The law presumes that if you made a purchase within the presumption period you didn’t intend to pay it. The creditor can and likely will win on that presumption if you don’t push back.
But you can push back. You can respond, with your bankruptcy lawyer’s assistance, that you actually did intend to pay the debt on the purchase(s). First, you can simply testify that your honest intention at that time was to pay that debt. Then you can back that up perhaps by saying you were not intending to file bankruptcy at that time. You didn’t decide to file and write off the debt until after you made those purchases. You can even bring up what event(s) pushed you into deciding to file bankruptcy after making the purchases. (This all of course assumes that these facts are true.)
In other words, you can defeat the presumption of fraud with evidence of no fraud.
Then the creditor may be convinced and could back down completely, and withdraw its challenge. Or it can negotiate a settlement, with both parties agreeing that you pay something, less than the amount the creditor wanted. Or, both sides could stand fast and have the bankruptcy judge decide whether and/or how much you would pay.
The Presumption Period for Cash Advances
The presumption of fraud for recent cash advances works the same way as with recent credit card purchases. There’s just a tweaking of the details. The presumption period of time for cash advances is 70 days from the time of each cash advance. (Not 90 days.) It only applies if the cash advance(s) made within that 70-day period exceed(s) $1,000. (Not $725.) (Bankruptcy Code Section 523(a)(2)(C)(i)(II), with the dollar amount valid from 4/1/19 through 3/31/21.)
Everything stated above about how the credit card presumption of fraud for purchases works applies to cash advances too. Most importantly, the creditor has to raise the presumption or else it has no effect. And if the creditor does so, you still have the opportunity to refute and defeat the presumption. That is, you and your bankruptcy lawyer can present evidence that you had intended to pay the debt at the time you made the cash advance(s).
Bankruptcy Timing and These Presumptions of Fraud
Besides being able to defeat these two presumptions of fraud, you can usually avoid them altogether. You do so by waiting to file bankruptcy past the 70- and 90-day presumption periods.
Sometimes waiting is easy. But in many circumstances time is not on your side. You are with pressure from creditors. You may have received a summons and complaint from a creditor. You may have your paycheck being garnished. Or you may have a vehicle at the risk of repossession or a home at risk of eviction or foreclosure.
Also, while you’re waiting to file bankruptcy bad things can happen that you don’t expect. The IRS or state tax authority may record a tax lien. A creditor lawsuit you don’t even know about could turn into a judgment against you. A creditor may try to take some other unexpected action against you or your possessions.
Deciding whether to delay filing bankruptcy to get past a presumption period is a balancing act requiring legal advance. It usually involves balancing several considerations and then making an informed choice about your best timing. You really cannot make the best judgment call on this without a bankruptcy lawyer’s thorough knowledge and experience.
Beyond the Presumptions to Regular Fraud
Another reason that legal advice is necessary is that the presumptions of fraud are not the end of the story. The presumptions are a tool that gives credit card creditors a modest advantage. But creditors can certainly raise fraud and misrepresentation-based challenges without that advantage. This applies to credit card creditors and essentially all creditors. If a creditor believes that the facts bear this out, it can try to argue that you incurred its debt with bad intentions of various sorts. This can happen regardless that the debt was incurred longer than 70 or 90 days before your bankruptcy filing.
Without getting into this more here, the point is that avoiding the presumption periods doesn’t necessarily mean you’re safe. A person could certainly make a credit card purchase or cash advance 6 months before filing bankruptcy with no intent to pay that debt. Or whenever. If a creditor believes that you incurred a debt under fraudulent circumstances, whenever that happened, the creditor could raise a challenge.
Rest assured that these challenges—with or without the presumptions—do not happen in most bankruptcy cases. Your lawyer will help you anticipate any such challenges. Then he or she will give you advice to prevent and, if necessary, defeat any such challenges.