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

By Tom Streissguth

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.

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.

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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.

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What is a Notice of Dismissal of Bankruptcy?
 

References

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Chapter 7 Relief of Stay

In a Chapter 7 bankruptcy, a debtor petitions the court for protection from lawsuits and collection efforts. As soon as the petition is filed, the court grants an automatic stay. This is a legal restraining order that goes out to all creditors whom the debtor has listed on the petition. The stay has the effect of immediately suspending collection actions, and preventing any new actions while the bankruptcy is in progress. Creditors may request relief from the stay, which the court will grant if it has grounds to do so.

What Happens to Open Lines of Credit With No Balance During Bankruptcy?

A debtor files bankruptcy to discharge his obligations and relieve himself of responsibility for paying them. If you have an open line of credit or a credit card with a zero balance, this isn't a debt. You don't owe anything, so you're not under any legal duty to include it in your bankruptcy petition. However, whether it will be there waiting for you when you come out on the other side of the proceedings is another matter.

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When an individual debtor files for Chapter 7 or Chapter 13 bankruptcy, creditors must immediately stop their collection efforts. Creditors sometimes may attempt to get around this ban by petitioning the bankruptcy court to "lift" the stay. A bankruptcy lift allows the creditor to continue collection activity, such as garnishing wages or foreclosing on a home, while the bankruptcy case is in progress.

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