Running up credit card debt, declaring bankruptcy a bad idea
Dear Credit Score Report,
I
am on Social Security and only make $800 a month. I have been building my
credit card lines of credit for many years, and I always pay off my cards in full
before applying for more credit and getting more lines of credit. If, in one
month, I maxed them all out (shopping spree/vacation), how many months could I
pay the minimum payment, then less than the minimum BEFORE I could just stop
paying all of them and file for bankruptcy WITHOUT having the court think I did
premeditated fraud? -- Jimmy
Hey Jimmy,
As a nonlawyer, I can't say whether a court would consider your
plan to be premeditated fraud, but I can tell you it's a bad idea.
For this week's column, I was tempted to use an elementary
school writing technique by including a dictionary definition of the word
"premeditated." But I think you already known what the word means -- and
whether it applies to your plan. Experts say it certainly sounds like it. "Yes,
it is fraud, because he blatantly states he is planning on charging up his
cards and then filing for bankruptcy versus innocently and gradually falling
into debt or having a sudden debt like a big medical bill," Terrence
Shulman, director of the Shulman Center for compulsive theft and spending, says
in an e-mail. Others agree the plan
sounds questionable. "He is, with intentionality, planning to charge an
amount he has no intention of paying in full, and if that's not fraud, I don't
know what is," says Gail Cunningham, vice president of public relations
for the National Foundation for Credit Counseling.
Whether you'll end up in trouble, however, isn't so clear.
That will depend on the amount of your debt, your explanation for the sudden
burst of charges and how shortly they occurred before your bankruptcy.
"There is no precise recipe for fraud," says Kenneth Doran, a lawyer in
Madison, Wis. Still, you'll be more likely to draw the wrath of your lenders
and the courts if you run up charges in the tens of thousands of dollars.
"Either the credit card company could object, or in some cases it could
even lead to not getting the benefits of the bankruptcy," Doran says.
Aside from the legal dangers, you also face the possibility
of damaging your credit history, your finances and your relationships.
Even before you file for bankruptcy, your credit score is
going to fall. That's because a maxed out account will reduce your FICO credit score by up to 45 points.Your planned bankruptcy will do much more serious
damage, causing your FICO score to plunge by as much as 240 points. A low
credit score will make borrowing difficult. "Bankruptcy is the most severe
action a person can take with regard to their credit history," says Rod
Griffin, director of public education for credit bureau
Experian. "Bankruptcy
will remain on a person's credit history for up to 10 years and can impact
their ability to obtain credit throughout that time." If you do obtain
loans, expect to pay higher interest rates and fees.
Your plan may also hurt your family and friends, since declaring
bankruptcy could leave your spouse (or any joint account holders) responsible
for your unpaid debts. Debt collectors could go after them in hopes of
recouping the money you failed to repay. "If the consumer filed Chapter 7
or Chapter 11 bankruptcy, the collector may pursue a claim against a co-signer
of the obligation or the consumer's spouse," says Valerie Hayes, general counsel
for ACA International, the nonprofit collection industry trade association. (If
you live in a community property state, debt accumulated during a marriage may
be the responsibility of both partners.) That means you won't be the only one
who suffers.
With a better understanding of the potential legal,
financial and credit scoring implications of your scheme, I hope you decide
that filing for bankruptcy isn't such a wise decision. In that case, if you've
already accumulated the debt, consider making efforts to repay your lenders. You
can use CreditCards.com's online minimum payment calculator to figure out how long it will take to pay off those balances.
Unlike running up balances and then declaring bankruptcy, repaying
your creditors is the right thing to do. "I think it's smart to evaluate
financial decisions in terms of what impact it would have if everyone did the
same thing that I was considering," says the NFCC's Cunningham. "Obviously,
if everyone embraced this person's plan, the financial system would go under."
Good luck!
--Jeremy
See related: 14 key factors when considering bankruptcy, FICO reveals how common credit mistakes affect scores, Sharing a roof with a parent doesn't mean sharing their bankruptcy, 8 things cardholders should know about community property laws
Jeremy M. Simon is a former CreditCards.com reporter who wrote about credit scoring, economic data, credit card crime and other issues. He is based in Austin, Texas. He is a graduate of Vassar College and has previously worked for Thomson Financial in New York City, where he wrote about the stock markets, and Texas Monthly, as well as several publications in Austin.
Send your question to The Credit Score Report.
Published: December 21, 2010
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