What would happen if you maxed out your credit cards and then went bankrupt? It sounds like a great idea. You go on a shopping spree and buy everything you need, and then go bankrupt so you don’t have to pay it back! Why stop there? Why not take some cash advances and use the money to pay for your bankruptcy?
While that approach may seem appealing, there’s a downside. Borrowing money (by using your credit cards) that you know you won’t repay is fraud, and fraud is illegal in Canada. If you are convicted of fraud, which is a criminal offense, you could go to jail, so it’s not a good strategy.
What’s The Risk?
What are the chances that you would go to jail for using your credit card before bankruptcy? Not much, but here’s what will happen:
When declaring bankruptcy, all of your creditors are notified of your bankruptcy, and they are all required to send the trustee a list of all of your transactions, including credit card activity, for the past three months. To do that, an employee of the credit card company must go into your file, review your prior transactions, and produce a list.
So you want to guess at what the credit card company will do when they see large transactions immediately before your bankruptcy? It’s likely that they will review your history over the last year or more to determine if there were any unusual transactions, and based on that review they may decide to take action.
What can they do?
First, they can request that you repay the money. Debts that are a result of fraud are not discharged in a bankruptcy, so if you don’t agree to repay the debts, they can take you to court, sue you, and garnishee your wages.
Second, if you don’t agree to repay the money, they also have the option of opposing your discharge from bankruptcy. A court hearing is then held, and the court may require you to repay some or all of the money as a condition of your discharge.
All credit card transactions are recorded in a computer, so it is not possible to make big purchases or take cash advances and expect that no-one will notice. The credit card companies have sophisticated computer systems that can spot any unusual transactions. If for the last few years you have spent $1,000 per month on your credit card, and over the last month or two you are spending $3,000 per month, that change in your patterns will be noticed.
Here’s my advice: There is no point in racking up your credit card just prior to bankruptcy, because it will be noticed, and you will either have to pay it back or risk having your bankruptcy extended.
A better approach, once you realize you are in financial trouble, is to stop using your credit cards and meet with a trustee. By declaring bankruptcy you eliminate your credit card debt, and more importantly you eliminate your credit card payments. With no credit card payments you should have the cash necessary to make your monthly purchases, so you no longer need to rely on credit cards to pay your monthly expenses. That’s why being debt free is a good feeling, and a great way to live.