Can I Buy Things Before I File For Bankruptcy?
Some clients wonder, if they are about to file for bankruptcy, why not use the credit that is left on their cards? The answer is that using credit cards shortly before filing for bankruptcy is a recipe for difficulty . There are several problems that could arise.
Using credit cards after you have seen a lawyer about bankruptcy, and especially after you have decided to file is, simply, fraud because the debtor knows they will not be paying the bill. I have heard stories about people using their cards up to the credit limits just before they file and nothing bad happening, but this is akin to walking across the street with your eyes closed – you will make it across a few times, but eventually you will meet a solid, fast moving object. This type of use after seeing a lawyer but before filing seldom occurs, and should not occur if the attorney clearly tells the client not to use their cards again, which is what I think most attorneys do. The real problems in this area are with recent use from a time before a lawyer is consulted.
There are provisions in the Bankruptcy Code which create presumptions as to certain uses of credit before the bankruptcy is filed. This means that if certain purchases are made on credit within certain time frames, it is presumed to be improper. This comes up when a creditor objects to the discharge of their particular debt because they have detected what they think is improper use. All of the major creditors have computer routines that look for such use, and if it rises to certain levels, they may consider objecting to the discharge of their debt. If they are successful, their one particular debt will be excepted from discharge, but the remainder of the debts will be discharged.
The provisions in the Bankruptcy Code I am referring to provide that if more than $650.00 is charged to one creditor for what are called luxury goods or services within 90 days of the filing, they are presumed to not be dischargeable. The creditor has to bring a separate suit in the bankruptcy court and prove this, and doing so for $650.00 is not worth it, but if the total within those 90 days is higher, they might. And if they do so, the debt is presumed to be non-dischargeable, which means that it is up to the debtor to prove otherwise. In other words, the burden of proof is on the debtor.
In a similar vein, cash advances of more than $925.00 within 70 days are also presumed to be non-dischargeable. This does not mean that if the debts are outside these time limits they are safe, though. If a creditor can show that the use of credit, even if outside the 70-day or 90-day time period was such that no reasonable person could have been expected to repay the debt, they can still win their case. In this type of case it is up to the creditor to prove it, and not up to the debtor to refute a presumption. Here the burden of proof is on the creditor.
Before a creditor brings any of these cases, they will have to determine if it is worth it. First, they will judge the amount in questions, because bringing a case for $650.00, or even $925.00, is probably not worth the effort. Of even more importance, though, is the question of collectability of any resulting judgment. The creditor may win, but they will still have to collect by the usual methods, such as wage garnishments or grabbing bank accounts. If the debtor doesn’t have a job or a bank account, the creditor will have wasted their time and effort. There used to be a lot of activity in this area, but I think that it generally died down because of this reason – the creditors were left with judgments that could not be collected.
Sometimes, we lawyers get telephone calls and letters from law firms representing creditors telling us they think they have a good case against one of our clients, and would we like to settle the matter on an easy payment plan? This is something that used to happen a lot more in the past, but declined for the same reason – debtors seldom had the money to make the payments.
One final thing to know is that in a really egregious case, where someone has purchased thousands of dollars in merchandise just before filing, the entire bankruptcy case can be denied, not just the debts held by objecting creditors. The bankruptcy trustees can and do bring cases denying the overall discharge where they see a pattern of widespread abuse.
While these provisions are part of the Bankruptcy Code, they should not alarm the vast majority of debtors, because most people who file for bankruptcy simply don’t have the pattern of credit usage that give rise to problems such as those described in this post. Almost all debtors fit one of two patterns: those whose use of credit increased slowly over time until it was more than they could ever pay, and those who have had some sudden calamity that causes them to file, such as a job loss or a health crisis. For these debtors, objections to discharge are almost non-existent and should not be worried about.