Everyone has a problem sooner or later. The problem is you never know when it will come along. So, if you use a credit card or purchase an auto just before filing you are probably an honest but unfortunate debtor who simply didn’t know that bankruptcy was around the corner. 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 might also need washers, tires, and clothing just before the file. But, what about maxing out credit cards just before filing bankruptcy?

Maxing Out Credit Cards and Later Filing Bankruptcy

Bankruptcy judges make rulings in cases involving billions of dollars. A judge rarely thinks of it as fraud if a consumer buys a $1,000.00 tent for camping a month before filing bankruptcy. Bankruptcy judges hear cases involving corporate officers who defraud and steal millions from investors, creditors, and stockholders.

However, the mother who buys a car, riding lawn mower, or refrigerator just before filing Chapter 7 is rarely found guilty of fraud. Most consumers are just unlucky debtors who find themselves suddenly filing bankruptcy after a disability, death, or other emergencies. Bankruptcy for consumers means the family needs to recover. In fact, credit card companies understand, and they offer debtors credit cards within days after they file.

Filing bankruptcy due to emergencies is common and under these circumstances, debtors lack the intent to defraud. A debtor’s chance of forced repayment of debt because of a charge just before filing bankruptcy is less than 1 in 1,000. Normally, credit cards and check cashing amounts are always very small. Moreover, these cases often settle before an adversary case filing.

The problem is that if you max out credit cards just before filing bankruptcy, it looks like it’s part of your planning for bankruptcy. However, if you simply purchase back to school items in August, then, the creditor has a problem proving fraud. But, if the creditor files such a case, you might 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” justifiable.

Guidelines for Proving Nondischargeability when Maxing Out Credit Cards

To prove fraud, the nondischargeability must file within 60 days after the 341 meeting takes place or 90 days after the case files. Whether the person is a creditor or trustee, they must file the objection to discharge within these time periods. Plus, 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 will probably be able to prove fraud. Remember, it is always hard for a bankruptcy judge to pity a person who owns more than the judge does.

There is a statute that says charging over $650 in “luxury goods or services” from a creditor up to 90 days before filing is presumed to be nondischargeable. Cash advances over $925 up to 70 days before filing is also presumed nondischargeable. However, only that charge is nondischargeable while the rest of the account is dischargeable. There are at least 18 other factors that may prove it was not fraudulent. However, normally, just waiting for a short period eliminates these presumptions. After these periods the burden of proof is heavily on the creditor and nearly impossible.

The amount you charge, the type of goods you buy, and the timing are the only three of 20 factors that a judge considers. Suddenly becoming disabled after you made the charges means the bankruptcy was not foreseeable and there is no fraud. Even if the person is a little unrealistic, it’s the state of mind of the client that determines if it is fraudulent. Therefore, if the belief is reasonable that the debtor was going to repay, then, if something happens later, it’s easy to prove the charges are not fraudulent.

Filing Chapter 7 Bankruptcy Immediately after Using Your Credit Cards

Chapter 7 Trustees most often concern themselves with 18 USC §152 the Concealing of assets. A Chapter 7 Trustee wants to find and sell assets that he gets up to 25% if the asset is not in the petition, it cannot be exempted, therefore, he can sell it.

But if there is a scheme to defraud, a creditor or trustee may refer to 18 USC§157 to deny you from discharging the debt. Fraud in the bankruptcy sense is rarely criminal. In 30 years of practice and thousands of cases, none of my clients received a criminal charge. Even when a client admits he intentionally planned to charge just before filing, the worst sanction was the amount and it could not be discharged. Therefore, if you continued to use the card after filing again, the sanction would be whatever you charged would be nondischargeable.

Example of Fraud with Credit Card Purchases Before Filing Bankruptcy

From 2010 to 2018 I didn’t have one creditor file an adversary proceeding to recover 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. Then, he admitted to planning the purchase and bankruptcy under oath. As a result, he had the court declare the debt for 12 of them to one creditor declared nondischargeable and then, discharged the debt for the other 12.

When cases like this file to deny the discharge, it’s normally 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 that part of the debt is nondischargeable. But, the creditor still has to sue in state court to try to collect. That’s very hard to do for a debtor who ‘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.

Guidelines for Credit Card Use After Your Bankruptcy Files

After you file bankruptcy, do not continue to use your credit card and charge on that card. However, there is no sanction for obtaining a new credit card and using it after filing. But your filing is your testimony that you can no longer afford your old debt. Therefore, filing bankruptcy revokes the old debt. Any new charges will not discharge because discharges only occur when you file bankruptcy.

After filing, you’ll find your mailbox stuffed with offers for new credit cards and autos. Of course, most of the offers will be for higher interest rate autos and cards. I 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 can easily 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.

The Schemes that Lead to Business Bankruptcy Fraud

Commonly, a person goes into business but doesn’t know how to keep records. In the case of a business debtor who fails to keep records and can’t account for funds, the worst-case scenario is that 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. But, proving business fraud in bankruptcy is hard. After the assets are gone, it might be impossible to recover the assets. Interestingly, consumers are amateurs in comparison to the abilities of CPAs and executives to commit fraud.

Common schemes in business bankruptcy fraud include the following:

⎆ Bust-outs

Bust-outs are when 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

Fraudulent financial bookkeeping happens when the debtor overestimates income and assets or underestimates expenses and debt.

⎆ Bleed-outs

Bleed-outs are when 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. The theft is of corporate opportunities. Moreover, they disguise, plan, and use shell corporations.

⎆ Looting

Looting occurs when corporate officers and debtors convert and take assets. The corporate officers often pretend these are arm’s length transactions when they are actually selling assets to another party or company. Furthermore, these parties or companies connect in some way to the officers who are selling or converting assets.

Resources for Bankruptcy

Louisville Kentucky Bankruptcy Forms

Bankruptcy Manual

Other Related Information

How to Discharge Student Loans in Bankruptcy

Bankrupt or Discharge Student Loans in Bankruptcy

Fraudulent Concealment and Transfers in Bankruptcy

If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.