Is It Fraud if You Are in Bankruptcy and You Just Got Approved for a Credit Card?

by Tom Streissguth
Some credit card issuers will offer secured cards, even during bankruptcy.

Some credit card issuers will offer secured cards, even during bankruptcy.

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If your debts are out of control and you can't meet your monthly payments, bankruptcy becomes a viable option. A bankruptcy court will stay any collections or lawsuits by your creditors; a court-appointed trustee will manage your financial affairs until the court discharges the debts. Credit card debt is a prime culprit in bankruptcies, but simply being approved for a new card does not rise to the level of fraud.

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Credit Cards and Bankruptcy

Running up credit card debt can put you in a deep financial hole. However, running up credit card debt just before filing for bankruptcy can put you on the receiving end of a fraud charge. A bankruptcy filing means you list all debts, including credit cards that you hold, and a notice to the creditors that you've filed the case. If a credit card company sees excessive charges just before the filing, it can file a motion in court to deny a discharge of those debts.

Presumption of Fraud

Under some circumstances, a bankruptcy court will presume fraud on the part of a debtor who uses credit cards just before filing for bankruptcy. Federal law sets some guidelines: the debtor should not have charged large purchases of more than $650 on any single credit card in the 90 days prior to filing; taken cash advances totaling $925 or more within 70 days of filing; made extensive credit purchases after consulting with an attorney regarding bankruptcy; or made false statements on a credit card application. If the court finds fraud, it can uphold a creditor's motion to not discharge the debt or refer the case to a prosecutor for criminal charges.

Application During Bankruptcy

New credit applications while under bankruptcy protection are, in most cases, an exercise in futility. The card issuer's guidelines will normally ban approval for anyone still in bankruptcy or while the bankruptcy remains on the credit report. Nevertheless, some lenders will offer new credit, knowing that a debtor in Chapter 7 bankruptcy may not file again for at least eight years. The local court rules may require a debtor to get the court's permission for any new borrowing while still in bankruptcy, whether it's a Chapter 7, in which the trustee liquidates the debtor's property to repay creditors, or a Chapter 13, which sets up a partial repayment plan.

Card Approval and Use

Simply being approved for a credit card while under bankruptcy protection does not rise to the level of fraud. Use of the card and incurring debt without the permission of the court, however, might bring sanctions. The court has the power to deny discharge of debts, meaning you would not be able to include the new charges in the bankruptcy. Further, if the court believes you've abused the bankruptcy law, it can dismiss your case, putting you again at the mercy of creditors. The court and the trustee would be more likely to approve new debt contracted to help you earn income, or allow non-dischargeable debts such as tax liabilities or government-backed student loans.