You can try. It might work. But if it doesn’t, you’re screwed.

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Question: I earned an MBA that cost me almost $70,000 in federal student loans. Of course, I figured I’d land a great job and would earn more than enough to pay them off. Then COVID-19 happened, and I lost my job. 

I have five credit cards, and I’m thinking of getting $70,000 in cash advances on them. Then I’d use that $70K to pay off my student loans. Before I’d have to pay those advances back, I’d file for bankruptcy. I’d owe nothing and be free and clear! 

Is this legal? Will it work?

– Zach in California

Steve Rhode, the Get Out of Debt Guy, responds…

Well, there are the rules, and then there’s reality. Certain things can’t be discharged in bankruptcy. Technically, two of those are:

  • credit card debt used to pay taxes
  • federal student loans

I say technically because I’ve been in this business long enough to see a lot of crazy things. The truth is, I’ve seen so few bankruptcies challenged over these two circumstances. So, in practice, the credit card debt has been fully discharged – even though the rules said it shouldn’t have been.

This has been especially true if you made the charges on your card a long time ago. I’ve seen the same thing for cash advances – especially if they were used for a purpose the credit card company can’t track.

Here’s what I think it comes down to: The credit card companies have a massive amount of claims to process these days. They can’t catch them all.

What this means, Zach, is that your get-out-of-debt plan relies not on the rules, but on five stretched-thin and pandemic-impacted credit card companies. It would be up to those companies to go back and label your charges as exempt when they were made. And then the credit card companies would have to object to the discharge of that debt when the bankruptcy is filed.

I’m not saying it can’t happen. I’m saying I almost never see it actually happen.

The bigger issue with the cash advances is the timing between when they were taken out and when you file bankruptcy. Cash advances too close to filing can trigger attention.

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The risk of an adversary proceeding

So if you intentionally pay off student loans with a credit card or cash advance and expect that it will be discharged in bankruptcy, you need to be comfortable with the fact the credit card company may challenge the charges and file what’s known as an “adversary proceeding” to prevent the discharge.

The bottom line is the charges shouldn’t be discharged, they often are discharged, and they could be challenged. I urge you to discuss this with your bankruptcy attorney when you first meet with them.

Connect with a top-rated bankruptcy team to get the qualified advice you need.

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About the Author’s writers are journalists, personal finance experts, and certified credit counselors. Their advice about money – how to make it, how to save it, and how to spend it – is based on, collectively, a century of personal finance experience. They’ve been featured in media outlets ranging from The New York Times to USA Today, from Forbes to FOX News, and from MSN to CBS.

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