Posted on: 11 May 2016
When money is tight and your student loan is due, it can be tempting to bust out your credit card in an attempt to avoid late fees. However, doing so could be a big mistake if you fall far behind on your bills and are forced to file bankruptcy. Read on to learn how paying your student loans with your credit card could result in you being charged with bankruptcy fraud.
The Dishonest Borrower
Student loan debt cannot be discharged during bankruptcy, but credit card debt can be. Occasionally, a dishonest borrower will intentionally use their credit cards to pay off as much of their student loan debt as possible and then file for bankruptcy in hopes of having all of that debt discharged. Their plan is to convert non-dischargeable debt to dischargeable debt and then cash in.
Why This Won't Work
The process of racking up credit card debt while knowing you'll never pay it is called card bust-out, and bankruptcy courts watch for this tricky maneuver. When you file for bankruptcy, your debt will be examined in detail. If you've made student loan payments with your credit card and the court suspects that you've done so in a deliberate attempt to extort the system, you could be charged with fraud on a federal level and face fines and/or jail time.
Alas, sometimes individuals feel as though they no choice but to charge their school debt to their credit card. If you find yourself in a situation where you're thinking of making your student loan payment with a credit card, here are some things to keep in mind.
Try to Negotiate Another Plan First. If you haven't already done so, give your loan service provider a call before you take out your credit card. Oftentimes, they're more than willing to work with borrowers who are experiencing financial difficulty. You may be able to switch your payment plan to one that's longer but with lower payments, or they may have an income-based repayment plan that will allow you to lower your payment amount until you're more financially stable. You may also be able to reduce or postpone your payments for some time with a deferment or forbearance plan.
Make Only the Minimum Payment Amount. If you can't lower or postpone your student loan payments and you absolutely need to make a payment with a credit card, only pay the minimum amount due at the time. Should you need to file bankruptcy, the bankruptcy court could interpret your throwing a large, unnecessary sum of money at your school loan when you were not financially stable as a red flag that you were trying to transfer your non-dischargeable debt to dischargeable debt.
Avoid Buying Luxury Items. If your credit card debt comes under scrutiny in bankruptcy court, you'll want to prove that you were just using your cards to get by. Everyday necessities are perfectly fine to charge when you're experiencing financial difficulty, but big-screen televisions and top-of-the-line stereo systems are not. The goal is to prove that you used your credit card for loan payments out of hardship, and people who are experiencing financial hardships should know that they can't afford luxury items.
As they're considered non-dischargeable debt, it's not a good idea to pay your student loans by transferring them to dischargeable credit card debt. If you do, no matter how honest you are, you'll still need to justify your decision to do so to the court if you find yourself needing to file bankruptcy. If you've already paid some of your school loan with your credit cards and now need to file bankruptcy, contact a bankruptcy attorney through a firm like Demers Gagnier Inc. so they can help you build a case to show that you had intentions of paying off your debt when you made the credit card payment(s) to your school loan provider.Share