Can a credit card company challenge a bankruptcy filing?

You’ve tried hard to pay down your debt, but despite your best efforts, your balances keep piling up. As a result, you’ve made the difficult decision to file for bankruptcy. You have two options:

• Under Chapter 7, debts are discharged between four and six months after a debtor’s non-exempt assets are liquidated. If the asset liquidation isn’t enough to cover the entire debt, the debtor’s obligation to pay is eliminated.
• Under Chapter 13, debtors are required to complete a three-to-five-year, court-approved repayment plan to cover their debts.

Credit card debt is one of the most common types of unsecured debt discharged during bankruptcy. Say you have $50,000 in credit card debt and find it’s difficult to impossible to pay it off, so you file for bankruptcy protection. Can a credit card issuer challenge your filing? The simple answer is yes — but only under certain circumstances.

Debts ineligible for discharge

Some debts may not be eligible for discharge under either type of bankruptcy, according to USCourts.gov. They include:

• Certain types of tax claims
• Spousal or child support or alimony
• Payments for willful and malicious injuries to person or property, fines and penalties owed to governmental units
• Most government-funded or guaranteed educational loans or benefit overpayments
• Personal injury caused by a debtor’s operation of a motor vehicle while intoxicated
• Funds owed to certain tax-advantaged retirement plans
• Debts for certain condominium or cooperative housing fees

In addition, Chapter 13 bankruptcy does not discharge mortgage payments.

Why issuers challenge bankruptcy filings

It’s rare that credit card issuers will challenge a bankruptcy filing, but it happens in certain circumstances.

Challenges based on pre-filing behavior

Some of the most common reasons issuers challenge bankruptcies have to do with actions taken by debtors before filing for bankruptcy.

For example, going on a credit card spending spree right before filing for bankruptcy isn’t smart. If you charge more than $800 for luxury goods on a credit card less than 90 days before filing for bankruptcy or take cash advances of more than $875 within 70 days of filing, the debt could be presumed to be nondischargeable, according to the U.S. bankruptcy code. The burden of proof to counter a discharge challenge is on you, the debtor.

Lying about your earnings on a credit application and then filing for bankruptcy is also a bad idea. “For example, you earn $35,000 a year, but in order to get an Amex credit line of $10,000, you put on your credit application that you earn $100,000 a year,” writes attorney Michael Goldstein of the Phillips Law Offices. “Hiding an asset or failing to disclose it in a bankruptcy proceeding are also grounds to challenge a debtor’s discharge.”

Other pre-filing circumstances that can lead an issuer to challenge your bankruptcy include:

• Higher spending on a credit card
• Withdrawing large cash advances
• Paying for travel with a card
• Using balance transfers to pay on other credit cards
• Spending above a credit card’s limit
• Continuing to make charges on a card after seeing a bankruptcy attorney

If you’re close to filing for bankruptcy, don’t overspend on credit cards — especially if you can’t pay them off. But don’t be afraid of using your cards at all. Using a credit card to cover unexpected events, such as a major car repair, or spending to support your family’s everyday needs will likely be seen as a necessary expense, rather than an abuse of your credit.

Challenges based on post-filing activities

However, you may not be out of the woods once you’ve filed for bankruptcy. Your discharges can still be challenged and denied for reasons including:

• Failure to provide requested tax documents
• Failure to complete a course on personal financial management
• The transfer or concealment of property with intent to hinder, delay or defraud creditors
• Destruction or concealment of books or records
• Perjury and other fraudulent acts
• Failure to account for the loss of assets
• Violation of a court order or an earlier discharge

What happens if your issuer wins their challenge?

If your issuer wins their bankruptcy challenge, you as the cardholder will be responsible for repaying the challenged discharge amount after your bankruptcy is completed. You can appeal, but the process is often complex, and there’s no guarantee that the discharge will be reversed.

Additionally, if your issuer can show that you, as the debtor, were involved in fraud or intentional misconduct, your bankruptcy case could be dismissed, leaving you on the hook for all of your debts.

Is filing for bankruptcy right for you?

Filing for Chapter 7 or 13 bankruptcy is not a decision that should be taken lightly. While it gives you the chance to either discharge or pay off the debts you owe, there are consequences. A Chapter 7 bankruptcy stays on your credit report for 10 years, while Chapter 13 is on for seven years, impacting your ability to access new credit during this time.

Your payment history is the most influential factor in determining your FICO score, and bankruptcy is one of the worst things that can happen to your credit, according to Experian. A bankruptcy on your credit report can cause your credit score to plummet by up to 200 points.

Following bankruptcy, you’ll find that it’s much harder to get approved for certain types of loans or credit cards. Even if you’re lucky enough to get approved, your interest rates will be much higher, your credit limits will be lower, you’ll have fewer lender options and you’ll be required to share more documentation to check your eligibility for lending products.

Your job search could also be affected if a potential employer does a background check on you. It’s illegal to report a bankruptcy filing after 10 years during a background check under the Fair Credit Reporting Act (FCRA). However, a bankruptcy that’s less than 10 years old can be included, possibly affecting your employment. Other things potential employers can see include:

• Credit history
• Education records
• Court records
• Property ownership
• Past employers
• Driving records
• Social media profiles

The bottom line

If you decide to go ahead with a bankruptcy filing, there are steps you can take to rebuild your credit profile. For example, try to:

• Sign up for credit counseling to come up with a strong game plan that prevents you from getting into credit card debt again in the future
• Pay any credit cards or loans you’re able to obtain on time every month
• If you decide to sign up for a secured credit card, be responsible when using it
• Keep an eye on your credit report and score via free weekly reports at annualcreditreport.com

With careful action, your bankruptcy filing will eventually have less and less of an effect on your credit score and history as time goes by.