Does Chapter 7 discharge recent credit card debt?

If you have begun thinking about filing bankruptcy in Minnesota, you would do well to stop using your credit cards. Although Chapter 7 discharges virtually all of your consumer debt, including your credit card debt, it may not discharge debts or cash advances you incur via your credit cards shortly before you file bankruptcy.

The reason for this is a little known provision within the Bankruptcy Code. Section 523(a)(2)(C)(I) contains a presumption against the discharge of a credit card debt totaling over $675 worth of consumer goods that you make within 90 days prior to your filing date.

Current bankruptcy case law

This precise situation came before the Bankruptcy Court for the Northern District of West Virginia just last year. The debtor had obtained an $8,000 cash advance on one of her credit cards a mere two months before filing bankruptcy. She bought consumer goods with the cash, and their total cost obviously exceeded $675. Not surprisingly, her bank objected to the discharge of this debt, citing Section 523(a)(2)(C)(I) and its presumption.

Unfortunately for the bank and fortunately for the debtor, the Bankruptcy Court overruled the bank’s objection, noting that while Section 523(a)(2)(C)(I) does indeed contain a presumption against discharge of recent credit card debt, the presumption is a rebuttable one, meaning that if, as happened in this case, the debtor can present clear and convincing evidence as to why the presumption does not apply to him or her, then the discharge will be granted.

In this case, the debtor testified that at the time she took out the cash advance, she intended to pay it back. She also testified as to the precise items she purchased with the $8,000, supporting her testimony with receipts. The Court held not only that her evidence proved that she had had no intention to defraud or deceive her bank, but also that the things she purchased were not luxury items, but rather household products that consumers normally purchase with credit cards. It therefore discharged her debt.

Applicability

Even though the West Virginia Bankruptcy Court declined to apply the Section 523(a)(2)(C)(I) presumption against this particular debtor, you live in Minnesota and the this state’s bankruptcy court is not bound by this decision. Your best interests therefore dictate that you wait to file bankruptcy for at least three months after you last use your credit cards.

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