The Cash Advance Complication

Individuals incur debt in a variety of ways.  From loans to purchases to interest, debtors who file for bankruptcy tend to accumulate debt from several sources.  Cash advances from credit cards are an additional source of debt.

Generally, after a debtor files for Chapter 7 bankruptcy, the listed debt will be discharged.  However, cash advances can be a source of debt that will not be discharged in the event of bankruptcy.

The Bankruptcy Code states that any cash advance obtained within 70 days of the bankruptcy filing exceeding $875, is presumed not dischargeable in bankruptcy.  The dollar value may change, but the premise and reasoning remains the same.  Congress enacted the relevant provision of the Bankruptcy Code to prevent debtors from exploiting the bankruptcy system.

Bankruptcy was created to allow the honest debtor to get a fresh start.  Congress did not want debtors getting cash advances right before they file for bankruptcy.  The idea is that debtors should probably know that they are contemplating bankruptcy within 70 days of filing.   Knowing you are preparing for bankruptcy, you know that you cannot afford your debt so it would not be prudent to accumulate more debt that you know you cannot pay down.

If a debtor knew cash advances within 70 days were still dischargeable in bankruptcy, they could withdraw all the cash they want, never expecting to pay it back, and immediately have that debt discharged after filing for bankruptcy.  It is this sort of abuse of the system that Congress is trying to curb.

For cash advances taken out within 70 days of a bankruptcy filing, a creditor must file an adversary proceeding to have the debt declared nondischargable.  Filing requires certain fees.  As a result, if the cash advance is not particularly large, some creditors will not bother taking time and paying the fees in order to file an adversary proceeding.  Creditors can also seek to have their debt declared non-dischargeable if the debt was acquired under false pretenses, false representation or actual fraud, meaning the debtor had no intent to repay the debt.  The creditor may seek to prove this by showing that the debtor has not been using the credit card recently.  If any such factors exist, it is more likely that the creditor will take time filing documents in court to have its debt removed from discharge.

However, since creditors do have the option to challenge the discharge of cash advances, it is generally best practice to wait to file bankruptcy until after the 70 day period to prevent complications.