Navigating Cash Advances and Bankruptcy: Essential Tips
Dealing with a mountain of debt can feel incredibly overwhelming. You’re stuck wondering, “How did I end up here?” It’s especially frustrating when unexpected expenses pop up, and a quick fix like a cash advance seems like the only option. But what happens when those cash advances, alongside other debts, become too much to handle? What happens when you’re considering bankruptcy after relying on cash advances? You’re not alone in this. Many people find themselves facing the tough decision of filing for bankruptcy after relying on cash advances.
This post digs into the connection between cash advances and bankruptcy, explaining how these financial tools intersect within the context of US bankruptcy law. It’s important to understand the ins and outs, especially because specific rules apply to cash advances when filing for bankruptcy. For example, did you know a cash advance you took out on a credit card could affect your bankruptcy? It’s true, and in this article we’ll cover what you need to know about the relationship between cash advances and bankruptcy.
What’s a Cash Advance Anyway?
Most people associate a cash advance with whipping out a credit card at an ATM to get quick cash. While that’s one example, cash advances go beyond just credit cards. Cash advances, including payday loans, can carry very high interest rates. Before you take out any loan, make sure you have a solid debt repayment plan.
Decoding Cash Advance Types
These short-term loans are designed for those moments when you need money quickly. They often come with higher interest rates than typical loans because lenders view them as riskier. This is because if you are considering a cash advance, there is a chance you have poor credit.
Here’s a breakdown of common cash advance forms:
- Credit Card Cash Advances: This is like borrowing money from your credit card company. These often have high-interest rates and additional fees.
- Payday Loans: Often called a “payday advance”, they bridge the gap until your next paycheck but usually involve extremely high-interest rates and short repayment periods. You’ll find, as it pertains to cash advances and bankruptcy, that these are treated the same. Organizations offer these as a quick way to get cash, but you need to make sure you are ok with the high interest rates.
- Merchant Cash Advances: Geared towards businesses, this type provides upfront cash in exchange for a portion of your future sales. These often come with a qualification calculator to help you determine if this product is right for your situation.
The High Cost of Convenience
The problem with most cash advances? That “fast cash” comes with a hefty price tag: high Annual Percentage Rates (APRs). When you factor in fees, you’re often looking at interest rates that can quickly spiral into a debt trap. Make sure you read all the terms and conditions, and have a plan in place should the interest on the original loan become too much to handle.
Cash Advances and Bankruptcy – What’s the Connection?
It’s fairly simple – people struggling financially sometimes rely on cash advances to make ends meet. If those same people decide to file for bankruptcy, those cash advances get factored in with other debts. But here’s the crucial point – when you file for bankruptcy, certain debts, like cash advances, might raise red flags under something called the “presumption of fraud” rule within Bankruptcy Code §523(a)(2)(C)(i)(II). While a Chapter 13 bankruptcy lets you keep your property, you are put on a strict repayment plan. If you are considering a Chapter 13 bankruptcy, it is advisable to consult with an experienced bankruptcy lawyer to learn about special rules that might apply in your case.
The Presumption of Fraud – What it Means for You
This legal term doesn’t mean you intentionally committed fraud. It just makes it tougher to get certain debts discharged. Think of it like this – imagine charging thousands of dollars on your credit card a week before filing for bankruptcy. Creditors might get suspicious, questioning if you truly planned to repay those charges. Lenders continue to lend money despite bankruptcy laws restricting cash advances, as they are still a profitable form of short-term lending.
So, where do cash advances fit in? Courts look at timing and amount, using the guidelines laid out by the Bankruptcy Code. For cash advances made within 70 days of filing, there’s a limit of $1,000. That amount needs to exceed $1,000, otherwise, that special rule won’t apply.
Imagine someone, let’s call her Sarah, took out two separate cash advances, each for $999 from different lenders, six days before filing for bankruptcy. Based on how the rule is written, those advances would likely not trigger a presumption of fraud. But that’s just one scenario, and the circumstances surrounding each cash advance matter greatly. This is exactly why consulting a bankruptcy attorney is crucial. They’ll look at the timing, amount, and specifics of your situation to figure out the best path forward. They can also clarify those special rules that apply to debts taken out shortly before filing, especially those deemed non-dischargeable, according to Bankruptcy Code §523(a)(2)(C)(i)(II).
Can You File Bankruptcy With Cash Advances and Still Wipe the Slate Clean?
Even with those special rules, successfully filing for bankruptcy and getting rid of cash advance debt is totally possible. Here are some important things to remember about cash advances and bankruptcy:
- Talk to a Lawyer: Bankruptcy law is tricky. They will assess if you need to wait to file to comply with those “look-back” periods for recent debts.
- Honesty is Key: When you’re talking to an attorney about cash advances and bankruptcy, be completely upfront about any recent advances you took out.
Cash Advances and Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often called “liquidation bankruptcy” helps individuals and businesses wipe out dischargeable debts. It can be an effective way to deal with overwhelming debt, especially unsecured debts such as medical bills and credit cards. A Chapter 7 bankruptcy trustee might view large cash advances taken out before filing as suspicious.
Remember that if you filed a Chapter 13 case, but your situation has changed (for instance, if you have experienced a significant income drop) you always have the option to convert your case to a Chapter 7 case. When exploring cash advances and bankruptcy, this could be an effective way to get your unsecured debts discharged within just a few months and finally put that debt chapter behind you without further payment obligations to the trustee. Make sure that when you are going through options with your bankruptcy attorney that you understand what debts will be discharged and what your repayment options are. This will allow you to rebuild your credit as fast as possible after your bankruptcy discharge.
Cash Advance After Bankruptcy? What Not to Do.
After tackling your financial struggles head-on through bankruptcy, the last thing you want is to fall back into debt. Sometimes you find yourself needing extra cash and are tempted to rely on old habits. It can be very tempting to take out a payday loan or cash advance, but they can be very predatory in nature and trap you back into a debt spiral. Just know that you can get a cash advance in the middle of your bankruptcy case.
Remember that bankruptcy impacts your credit score, which makes securing affordable loans difficult. Be careful and explore every available option, but with careful planning, you can rebuild your financial life after cash advances and bankruptcy. Credit card companies are less likely to lend if you have recent negative marks on your credit report.
Conclusion
Navigating cash advances and bankruptcy is undeniably stressful, but it’s critical to prioritize open communication with your legal counsel to explore alternative solutions for managing debt and avoiding potential pitfalls. Cash advances should always be a last resort as the high APR can put you in a worse situation. Bankruptcy is an option for some to get a fresh start, but you should be aware of the long-term ramifications.