Black Friday & Bankruptcy: The Dangers of Using Credit Cards Before Filing

The Holiday Shopping Trap: Why Black Friday Could Result in Bankruptcy Fraud

The holiday season brings tempting deals, but for those facing financial distress, using a credit card for Black Friday or holiday shopping can result in bankruptcy fraud. It’s an easy way to incur debt that the court or a creditor could declare non-dischargeable.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

What is Fraudulent Intent in Bankruptcy?

Bankruptcy allows you to wipe out most debt, but there are exceptions, especially if you use a credit card knowing you have no intention or ability to repay the debt.

While a creditor normally has to prove actual fraudulent intent, the Bankruptcy Code provides an easier route for creditors to challenge recent charges, shifting the burden of proof to the debtor.

The 90-Day Rule and Bankruptcy Fraud

This is the most critical section to understand if you are considering filing for Chapter 7 bankruptcy.

Under the Bankruptcy Code, specifically 11 U.S.C. §523(a)(2)(C), certain debts are legally presumed to be fraudulent if they occur too close to the filing date. This shifts the burden of proof from the creditor to you, the debtor.

The key thresholds you must be aware of are:

Luxury Purchases: Any purchases totaling more than $900, per the current Bankruptcy Code adjustments, that are incurred within 90 days before filing the bankruptcy petition are presumed to be non-dischargeable.

Cash Advances: Cash advances totaling more than $1,000 taken within 70 days before filing the bankruptcy petition are also subject to this presumption.

Professor’s Note: The Bankruptcy Trustee’s Scrutiny

It is crucial to understand that the bankruptcy trustee’s review of credit card usage extends beyond the strict 90-day window. Bankruptcy trustees routinely review the debtor’s overall spending pattern.

If the debtor incurred excessive or frequent charges for luxury goods over a more extended period (e.g., one year or more), it is common practice for the bankruptcy trustee to object or demand a satisfactory explanation for those transactions before recommending discharge.

What is a “Luxury Good”?

The law defines “luxury goods or services” as anything not reasonably necessary for the support or maintenance of the debtor or the debtor’s dependents.

Black Friday purchases like a new 60-inch TV, expensive jewelry, high-end electronics, or non-essential travel would almost certainly qualify as a luxury item. Essential expenses such as groceries, rent, utilities, and essential clothing are not considered luxuries.

The Financial Consequences: What Happens to the Debt Because of a Black Friday Shopping Spree?

If a credit card company successfully challenges the discharge of these debts, they do so by filing a lawsuit within the bankruptcy case called an Adversary Proceeding.

If you cannot successfully prove you intended to pay the debt, the debt will be ruled non-dischargeable.

This means that even after your Chapter 7 case is finished and all other debt is wiped out, you would still be legally required to repay the specific debt from that Black Friday shopping spree. Your “fresh start” would be compromised by this one remaining debt.

Professor’s Note: The practical consequences of recent credit card usage often begin at the 341 Meeting of Creditors, where the Chapter 7 bankruptcy trustee is likely to question large, pre-petition charges. If the trustee successfully objects to the debt’s discharge, the amount in dispute will be paid back to the bankruptcy estate, and the trustee will disburse those funds to the unsecured creditors.

An even more severe risk occurs if the U.S. Trustee’s Office, a division of the Department of Justice, suspects criminal intent and opens an investigation for bankruptcy fraud. Even without a criminal investigation, defending your spending could lead to costly procedures, such as a Rule 2004 Examination or an Adversary Proceeding.

The Rule 2004 Examination

A Rule 2004 Examination is a discovery tool used by the bankruptcy trustee or creditors that is similar to a deposition in regular litigation. It allows the examining party to thoroughly investigate the debtor’s financial transactions, particularly those leading up to the filing date.

If the bankruptcy trustee or a creditor is highly suspicious of the Black Friday spending, they will likely demand a Rule 2004 Examination. The debtor must attend, respond to document demands, and submit to questioning under oath. This process adds significant time, stress, and, most importantly, unforeseen legal fees to the bankruptcy case.

The Hidden Cost: Adversary Proceedings

It is critical to understand that when a creditor challenges the discharge of a debt through an Adversary Proceeding, this is not typically covered by the standard fixed-fee bankruptcy retainer agreement. Your initial payment to your attorney covers the preparation and filing of the Chapter 7 bankruptcy, including attending the 341 Meeting of Creditors.

Defending you in an Adversary Proceeding requires the lawyer to represent you in a separate lawsuit on your behalf, which involves pleadings, discovery, and potentially a trial. This work is billed separately, often at an hourly rate, which can substantially increase the total cost of your bankruptcy case, easily exceeding the value of the luxury item purchased.

The Professor’s Take: Best Practice for Bankruptcy Filers

The safest and most conservative approach to ensure a smooth discharge is simple: Stop using your credit cards immediately upon deciding to file for bankruptcy.

If you must use a credit card for absolute survival, restrict it only to absolute necessities, like food or medication, and keep detailed records. Short-term financial discipline is the key to long-term financial freedom. Do not let the temptation of a holiday sale jeopardize your entire financial future.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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