Many people assume that bankruptcy filings go up right after Christmas because people use their credit cards to purchase gifts and find themselves unable to make the payments when the bills arrive in January. We often hear from people who are in this situation, and they ask questions about any problems associated with their recent use of credit. While the Bankruptcy Code does have provisions relating to recent use of credit, these problems rarely come up when people do file for bankruptcy.
The provisions that people have heard about provide that consumer debts of $650.00 for luxury goods and services owed to a single creditor that were incurred within 90 days of the filing are presumed to be non-dischargeable, meaning you cannot get rid of them in a bankruptcy. The reason this is usually not a problem is because of the all the qualifying words in that sentence. First, it has to be $650.00 or more to a single creditor. If more than $650.00 was charged, but no more than $650.00 to any one creditor, there is no problem. Second, the charges have to be for luxury goods. There is no definition for “luxury goods” in the law. What constitutes “luxury goods” is decided by judges on a case by case basis. Is a television a luxury? What about toys for the children for Christmas? What about clothes? I am sure a mink coat would be a luxury, but what about a new coat for one of the children? Would it be a luxury if it is leather, but not a luxury if it is a cloth coat?
There is a provision that says luxury goods does not include items reasonably necessary for the debtor or the family. Again, what is reasonably necessary has to be decided by a judge on a case by case basis.
There is another provision that provides that cash advances of $925.00 or more during the 70 days prior to the filing are also presumed to be non-dischargeable.
The reason that these provisions do not impact cases in the real world is that it is expensive for the creditor to have any debt declared to be non-dischargeable. While some provisions that except certain debts from being discharged are automatic, such as child support, the provisions regarding luxury goods and cash advances require the creditor to bring a separate action in the bankruptcy court and have a judge, after hearing all the evidence, declare the debt to be not discharged. In almost all cases, and especially when the amounts are not much more than the limits mentioned, it is simply not worth it for the creditor to bring such an action. If such an action were brought, and it was defended by the debtor, it could cost the creditor thousands of dollars to get a judgment declaring a debt to be not discharged. On top of that, the creditor now has a judgment that the creditor has to try and collect from someone who just filed bankruptcy, so even if the judgment is won, it might not be worth it.
You Can Get Your Debt Discharged
In the real world, such actions are brought only in extreme cases, where a debtor took massive cash advances or purchased some luxury item that was quite expensive. If all that was bought was a Playstation 4 and a few games for $700.00, it probably would not be worth it to bring an action.
This is a simplified explanation of these provisions, and there can also be problems with purchases or cash advances outside of the time limits. As always, it is important to speak with an attorney about your individual case before deciding what to do. However, for most people, having used their cards for Christmas gifts will not be a bar to a discharge of their debts.