Credit Cards and Later Filing Bankruptcy
Everyone has a problem sooner or later. The problem is you never know when it will come along. If you use a credit card or purchase an auto just before filing you are probably an honest but unfortunate debtor who simply did not know when he purchased a car or merchandise he would have to file bankruptcy. People often charge on their credit cards or find themselves needing a car just before a family death, divorce, or disability forces them to file bankruptcy. They need washers, tires, and clothing just before the file; just like they need items after they file.
Bankruptcy Judges make rulings in cases involving billions of dollars. A judge rarely thinks of it as fraud if a consumer files a bankruptcy case and buys a 1000.00 dollar tent for camping a month before filing. Bankruptcy judges hear cases involving corporate officers who defrauded and stole millions and billions of dollars from investors, creditors and stockholders.
The mother who bought a car, riding lawn mower or refrigerator just before filing Chapter 7 is rarely found to be guilty of fraud. Most consumers are just unlucky debtors who found themselves being forced to file bankruptcy after a disability, death or another emergency. Bankruptcy for consumers means the family needs to recover.
Credit card companies understand, and they offer debtors credit cards within days after they file. Filing bankruptcy due to emergencies is common. It means debtors lack the intent to defraud. A debtor’s chance of being forced to repay a debt because they charged, it just before filing bankruptcy is less than 1 in 1000. Credit card and check cashing amounts are always very small. These cases are often settled before an adversary case is filed.
Credit Card Fraud and Bankruptcy
The problem is that if you max out credit cards just before filing bankruptcy, you may look like you excessively planned your bankruptcy. If you simply purchased back to school items in August just before you or children went back to school, a creditor would have a problem proving fraud. If the creditor filed such a case, you would probably recover attorney fees and damages for him filing such a lawsuit under 11 USC § 523 (d). Threatening a debtor with a credit card action and not being able to prove it allows damages when a creditor’s action is not “substantially justified.
Cases to prove fraud nondischargeability, have to be filed within 60 days after the 341 meeting was first scheduled or 90 days after the case was filed. Whether the person is a creditor or Trustee, the person has to file the objection to discharge within these time periods. The burden of proof is generally on the creditor, not the debtor. If you purchase extreme luxury items like 24 Rolex Watches days before you file bankruptcy, the creditor would probably be able to prove fraud. It is always hard for a bankruptcy judge to pity a person who owns more than the judge does.
There is a statute which says charging over $650 in “luxury goods or services” from a creditor up to 90 days before filing is presumed not to be dischargeable. Cash advances over $925 up to 70-days before filing is also presumed not dischargeable. Only that charge is nondischargeable. The rest of the account is discharged. There are at least 18 other factors which may prove it was not fraudulent. Normally just waiting a short period eliminates these presumptions. After these periods the burden of proof is heavily on the creditor and nearly impossible.
The amount you charged, the type of goods you bought and the timing are only 3 of these 20 factors a judge looks at. Suddenly becoming disabled after you made the charges means the bankruptcy was not foreseeable and there was no fraud. Even if the person was a little unrealistic, it is the state of mind of the client which controls whether it was fraudulent. If the belief was reasonable that they debtor was going to repay. If something later happens then, it is easy to prove the charges were not fraudulent.
Credit Card charges before filing Chapter 7 Bankruptcy and fraud
A Chapter 7 Trustee is most often concerned with 18 USC §152 the Concealing of assets. A Chapter 7 Trustee wants to find and sell assets which he gets up to 25% of, If the asset has not listed in the petition it cannot be exempted, and he can sell it.
But if there was a scheme to defraud a Creditor or Trustee may try to 18 USC§157 to deny you from discharging the debt and collecting the funds. Fraud in the bankruptcy sense is rarely criminal. In 30 years of practice and thousands of cases, I have never had a client criminally charged. Even when a client admitted he intentionally planned to charge just before filing the worst sanction was the amount charged could not be discharged. If you continued to use the card after filing again, the sanction would be whatever you charged would be nondischargeable.
Examples of fraud and credit card purchases just before filing bankruptcy
From about 2010 to 2018 I have not had one creditor file an adversary proceeding to recover the money from a client who charged even thousands of dollars on a card before filing. In 2010 I had a client who purchased 24 Rolex watches before filing. He admitted to planning the purchase and bankruptcy under oath. He had the court declare the debt for 12 of them to one creditor declared nondischargeable and discharged the debt for the other 12.
When cases like this are filed to deny the discharge, it is normally filed by just one creditor who only wants his debt to be held nondischargeable. The bankruptcy judge does not rule that you owe the debt or even that you have to pay it. The judge only makes a limited ruling a part of the debt is nondischargeable. The creditor still has to sue in state court to try to collect. That is very hard to do from a debtor who has just filed for bankruptcy and who has no assets to pay the debt. This is why a creditor filing a lawsuit of nondischargeability is rare.
Can you use a Credit Card after filing bankruptcy
After you file bankruptcy, you should not continue to use your credit card and charge on that card. There is no sanction for obtaining a new credit card and using it after filing. But your filing is your testimony you can no longer afford your old debt. Filing bankruptcy revokes the old debt. Any new charges will not discharge because they will occur when you fill.
You will find your mailbox stuffed with offers for new credit cards and autos. Most of the offers will be for higher interest rate autos and cards. I would suggest that if you retain and reaffirm an auto and repay over a six month period your FICO score will increase to a point where you will easily be able to get an auto or credit card at a reasonable rate of interest. We have an article on how to recover with a 720 credit score on your own, or you can use the services at 725 to bounce back from bankruptcy with a higher credit score.
Business Fraud and charging before filing in Bankruptcy cases
It is common that a person may go into business and not know how to keep records. In the case of a business debtor who failed to keep records and can’t account for funds, the worst case may be he or she is denied the ability to receive a discharge.
It is impossible to list all of the different schemes a business insider can use to charge up business debts and then attempt to bankrupt the debts. Proving business fraud in bankruptcy can be hard. After the assets gone, it may be impossible to recover the assets. Consumers are amateurs when compared to the abilities of CPAs and executives in committing fraud.
Common schemes in business bankruptcy fraud include:
Bust-outs where the company obtains credit just before filing by pyramiding the credit of the company making small and increasing charges and then suddenly heavily charging just before filing.
Fraudulent financial bookkeeping where the debtor overestimates income and assets or underestimates expenses and debt.
Bleed outs where the company charges expenses and transfers assets to insiders making the company worthless. These insiders make certain the company fails so they can take the assets of the company. Theft can be of the corporate opportunities, and the thefts are disguised, planned and made through shell corporations.
Looting where corporate officers and debtor will involve in converting and taking assets. The corporate officers will often pretend these are arm’s length transactions when they are actually selling and diverting assets to another party or company. In some ways connected to the officers who sold or converted assets.