Oftentimes clients are left with no option except to file for credit card debt bankruptcy. In the typical scenario, a client has failed to make all the credit card payments and the account has become delinquent. In some instances a default with one credit card company can cause other credit card companies to increase their interest rates and other fees. This is called a universal default.
Usually credit card companies will attempt to negotiate a settlement with a client for a lump sum payment before they institute legal proceedings. For example, if $10,000 is owed on a credit card the company may agree to a payment of $3,000 to resolve the debt. Unfortunately, because the credit card company has forgiven $7,000 of debt, in this example, this constitutes a forgiveness of debt under the tax code and the amount of debt forgiven by the creditor will, in most instances, be treated as income to the individual and the individual will have to pay income taxes on the $7,000 which has been forgiven.
In most instances it is possible to legally wipe out credit card debt in a bankruptcy proceeding. There are several factors, which can determine whether credit card debt will be discharged in a Chapter 7 bankruptcy. For instance, if the credit card debt was incurred within sixty (60) days of filing the credit card debt bankruptcy petition, the debt may presumed to have been fraudulently incurred and the credit card bankruptcy debt may not be discharged.
Another issue associated with credit card debt bankruptcy is cash advances taken from cards before filing bankruptcy. Depending upon the timing of the cash advance and the amount of cash advance, the debt may not necessarily be discharged in the credit card bankruptcy case. For example, if a cash advance of more than $750 was made within seventy (70) days of filing the bankruptcy case, then the charge would be presumed to be fraudulent and perhaps the debt would not be wiped out.
In addition, if luxury items totaling more than $500 were made within ninety (90) days of filing the bankruptcy case, then these charges also would be presumed to be fraudulent.
Moreover, if a creditor believes that the information on the credit card application was materially false, the creditor may file a lawsuit in bankruptcy court to deny the discharge of the credit card debt. If a creditor files a lawsuit in bankruptcy court to deny the discharge of debt, this is called an adversary proceeding, and the bankruptcy lawyer must file an answer to the allegations contained in the lawsuit.
Generally speaking it is rare for a credit card company to file a complaint that seeks to deny discharge of credit card debt. However, if a creditor files a lawsuit in a Chapter 7 bankruptcy proceeding, the court examines several facts determining whether or not credit card debt should be discharged.
The court can take into account the amount of the charges, the debtor’s ability to repay the debt when the charges were incurred, the length of time between the charges and the filing of the bankruptcy case, whether the charges were made for luxuries or necessities, whether the particular charges represented a deviation from the debtor’s normal purchasing patterns, and whether the debtor was employed when the credit card charges were incurred.
In sum, the timing of filing a credit card bankruptcy case is critical and many of these issues may be avoided and the credit card debt may be discharged with proper planning.