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Does Chapter 7 discharge recent credit card debt?

When you begin considering filing Chapter 7 bankruptcy in Indiana, likely one of your biggest reason is that you have too much consumer debt and Chapter 7 discharges virtually all of it, including your credit card debt. If, however, you plan to go on using your credit cards right up until the time you file bankruptcy, you may want to reconsider that decision.

As reported by Bloomberg News, the Bankruptcy Code contains a little known presumption against the discharge of recent credit card debt. Section 523(a)(2)(C)(I) states that any credit card debt of over $675 that you incur for the purchase of consumer goods within 90 days of the date on which you file bankruptcy should not be discharged.

Recent Bankruptcy Court decision

The Bankruptcy Court for the Northern District of West Virginia recently took up this issue in a case where the debtor had taken out an $8,000 cash advance on her credit card only two months before she filed Chapter 7 bankruptcy. She used this cash advance to purchase consumer goods obviously amounting to far more than $675.

The bank that backed her credit card filed an objection to discharge of this debt with the Court, and cited the Section 523(a)(2)(C)(I) presumption against discharge as its grounds. After listening to all the evidence presented at the hearing, the Court overruled the bank’s objection and allowed the debt to be discharged.

The Court held that even though the presumption against the discharge of recent credit card debt exists in the Code, it nevertheless represents a rebuttable presumption. This means that in any given Chapter 7 case, the debtor can present evidence to rebut the presumption, thus making it inapplicable to him or her.

This is exactly what the debtor did in this case. She testified that she did not intend to file bankruptcy when she took out the cash advance, and in fact intended to pay her credit card bill. She also testified as to the household goods she purchased with the cash advance money, and backed up this testimony with her receipts for her purchases, showing that none of them represented luxury items. Based on this evidence, the Court ruled that she had rebutted the presumption.

Admittedly, the West Virginia Bankruptcy Court has no jurisdiction over Indiana and our Bankruptcy Court need not treat this decision as precedent that it must follow. Nevertheless, once you start thinking about filing bankruptcy, you should stop using all your credit cards. You skate on thin ice if you do not.

This is general educational information and not intended to provide legal advice.

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