Charging after bankruptcy filing can backfire


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
My lawyer said he was filing our Chapter 13 (repayment) papers today. Can we use a new credit card we had today to celebrate our son's birthday? -- Rosa


Dear Rosa,
As you surely know, a Chapter 13 bankruptcy is a court-supervised repayment plan that lasts three to five years. Although it comes with many helpful features -- such as staving off foreclosure, suspending interest and fees, and being able to discharge certain remaining balances -- there are also plenty of restrictions. For example, you’ll have to make consistent payments and probably have to cut back on other spending each month to do so. If you happen to earn more -- which may include inheriting money, getting a raise or being granted a large bonus -- off that cash goes to your creditors.

Another major restriction is credit use. The lawyer who is assisting you with the paperwork should have informed you that getting into more debt while you're in repayment mode is only acceptable with the knowledge and permission of the trustees (an individual, law firm or company that oversees the bankruptcy).

But that's afterward. Can you charge a little something for your child's birthday before the paperwork is filed with the courts? The answer is yes, according to Rick Mitchell, a Chapter 13 bankruptcy specialist from Charlotte, North Carolina. But should you charge? That's a different question. Ethically, it is acceptable only if it's a matter of life and death -- like ensuring there will be food on the family table or covering the cost of a vital medical procedure. Otherwise, don't do it. "In my mind it's a question of right and wrong," says Mitchell, who advises his clients not to use their credit cards prior the bankruptcy unless the need is extreme.

If you're wondering whether a credit card company might protest the inclusion of a recent charge, Mitchell says that is an unlikely scenario. It would have to go through a lengthy legal rigmarole to prevent the debt's inclusion, and in most circumstances it's not worth the creditor's effort. Ultimately it is a matter of financial value. "A $500 laptop won't trigger a dispute," says Mitchell. "A new BMW will."

I agree with Mitchell's moral judgment call. Of course your son would like to open a special present on his birthday, and just as naturally you, as his mother, want to make him happy. The problem is, if you charge the item, you're borrowing those funds from the issuer with a promise to repay. Knowing full well that you're filing for bankruptcy and will probably end up either not paying for it or only partially paying for whatever you charge today is a fraudulent act, even if you're not called on it. It's just wrong.

What is right is treating your son to something affordable, from your personal reserves. In the event that the item is still too expensive, ask friends and family members to contribute. Or sell something of value and apply the proceeds to the gift.

As far as the credit card you have now, be aware that it may not be open for long. Even if there is no balance on it and you're allowed to keep the card, the issuer will receive notice that you've filed for bankruptcy and is free to cancel the account at any time. You may try to preempt that action with a phone call. It's worth a try, especially if you want to have a credit card for shopping online. Credit cards offer more powerful consumer protection than debit cards that are attached to checking accounts.

Just remember, though -- no more debt. Pay in full and on time. I presume you're trying to better your financial life with the Chapter 13, but you'll be spinning your wheels if you're adding to the balance.

See related: Video: Chapter 7 versus Chapter 13 bankruptcy, Beyond bankruptcy: What happens when you fail Chapter 13

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Published: March 2, 2016

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Updated: 10-24-2016

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