Dear Credit Score Report,
Ia m 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
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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.
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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 bureauExperian. "Bankruptcy will remain on a person's credit history for up to 10 years and can impacttheir 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 7or 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 maybe 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'vealready 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."
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