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Will Chapter 7 discharge recent credit card debt?

You likely have heard that if you file Chapter 7 bankruptcy in Illinois, the Bankruptcy Court will discharge all of your credit card debts. In general, this is true. However, it may not discharge your very recent credit card debts.

Bloomberg News reports that Section 523(a)(2)(C)(I) of the Bankruptcy Code contains a little known presumption against such discharges. The presumption applies to any credit card debt of $675 or more that you assume for the purpose of buying consumer goods within 90 days of filing bankruptcy.

Case law

The Bankruptcy Court for the Northern District of West Virginia recently addressed this precise issue. In that case, two months before filing for bankruptcy, the debtor used one of her credit cards to obtain an $8,000 cash advance. Understandably, the bank behind her credit card petitioned the Court to deny discharge of this debt, citing the presumption as grounds therefor.

Upon hearing the evidence the debtor presented, the Court denied the bank's motion and allowed the discharge. Why? It stated that the Section 523(a)(2)(C)(I) presumption is just that. A presumption that the debtor can overcome with sufficient evidence. In this case the debtor did exactly that. First she testified to her intent at the time she obtained the cash advance, denying that she had had any intent to defraud the bank and instead had intended to repay the debt. Then she presented receipts showing the purchases she had made with the $8,000. The court found her testimony credible and also found that the consumer goods she purchased, while clearly exceeding $675, nevertheless represented common household goods that most people buy with their credit cards. She did not purchase any luxury items with the money.

Cautionary tale

While the debtor won in this particular case, you might not be so fortunate in your bankruptcy should you assume credit card debt right before you file. Your best course of action is to stop using your credit cards when you first begin thinking seriously about bankruptcy.

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

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