Why Balance Transfers Before Bankruptcy Are Risky
A balance transfer moves debt from one credit card to another, usually to take advantage of a lower interest rate. In normal circumstances, this is a reasonable financial strategy. Before bankruptcy, it is a trap.
When you transfer a balance to a new card and then file bankruptcy, the new card issuer can argue that you obtained credit with no intent to repay -- which is fraud under Section 523(a)(2)(A). The transferred balance may be declared nondischargeable.
The problem: You shifted debt from a card you were already planning to discharge to a new card you never intended to pay. Courts view this as obtaining credit through a false representation of intent to repay.
The 90-Day and 70-Day Rules
Section 523(a)(2)(C) creates two presumptions that can apply to balance transfers:
- Luxury goods over $800 charged to a single creditor within 90 days of filing are presumed nondischargeable
- Cash advances over $1,100 from a single creditor within 70 days of filing are presumed nondischargeable
A balance transfer may be treated as a cash advance or as an extension of credit subject to fraud analysis. Either way, the timing creates problems.
How to Avoid This Problem
- Do not transfer balances if you are considering bankruptcy in the next 6-12 months
- If you already transferred, wait at least 90 days (preferably longer) before filing
- Make payments on the transferred balance to demonstrate good faith
- Keep the old account open -- closing it immediately after transferring looks intentional
Best practice: If you are even thinking about bankruptcy, do not move money around between credit cards. Leave everything where it is and consult with an attorney before making any financial moves.
What If You Already Transferred?
If you already made a balance transfer and need to file bankruptcy, timing and documentation matter. Consider:
- When the transfer was made relative to when you first considered bankruptcy
- Whether you made payments on the new card after the transfer
- Whether you continued using the old card after the transfer
- Whether you applied for the new card specifically to transfer balances before filing
An attorney can help you evaluate whether the transfer creates a dischargeability risk and whether waiting to file would resolve it.