It may be tempting to use credit cards this holiday season, especially if you already plan to file bankruptcy after the new year. But doing so may delay discharge or make those credit card debts non-dischargeable.
When you use credit cards for purchases or cash advances immediately before filing bankruptcy, creditors can argue that you perpetrated bankruptcy fraud and debts incurred through fraud are generally non-dischargeable. This can complicate filing bankruptcy after the holidays.
Bankruptcy fraud can take many forms, including but not limited to concealment of assets; knowingly making false statements in your petition or at a hearing; obtaining credit under false pretenses; or, in this case, purchasing items — especially luxury items — on existing credit with no intent to repay the debt.
Many people ask how will the creditors or the trustee know whether someone ‘intended’ to repay certain debt.
It is true that it can be difficult for creditors to prove someone’s subjective intent. However, if creditors can prove that you were unable to pay for the items at the time of purchase or that you already had met with a bankruptcy attorney, it may be sufficient.
Usually the ‘lookback’ period for existing credit use is about 60 days, but this is not a license to load up your credit cards and wait 61 days to file bankruptcy. If creditors can prove any purchases were made in contemplation of bankruptcy, the debt may be non-dischargeable, even if older than 60 days.
Cash advances made on credit cards within 70 days of the date of the bankruptcy petition may create a presumption of non-dischargeability if the total from any single creditor exceeded $1,000 and the funds were not withdrawn for a business purpose.
Another presumptive against dischargeability specifically applies to luxury items purchased on a credit card within 90 days before bankruptcy. The term ‘luxury item’ generically can apply to any goods or services not reasonably necessary for the debtor or the debtor’s dependents.
There are some conflicts within the case law about what specifically constitutes a luxury item, so we encourage people to broadly apply the rule to any nonessential purchases.
So what happens if creditors suspect fraud…
Adversary Lawsuits Within the Bankruptcy
A creditor who suspects a debtor committed fraud may file a lawsuit against the debtor within the bankruptcy called an adversary proceeding.
Even if the creditor’s fraud claims are ultimately unsuccessful, suspicion of fraud complicates a bankruptcy and causes the debtor to incur significantly more expense to defend against this litigation.
We are unaware of any bankruptcy attorneys who include adversary litigation in their standard bankruptcy fee agreement. More likely, the attorney will require a substantial fee retainer from which he or she will bill hourly for the litigation.
Debtors who file bankruptcy without an attorney may represent themselves in the adversary litigation but it is strongly inadvisable. Besides making certain debt non-dischargeable, other potential consequences of adversary litigation include dismissal of the bankruptcy, civil fines up to $250,000, and even criminal prosecution.
Debtors accused of bankruptcy fraud should immediately retain an experienced bankruptcy attorney. Contact us for a free consultation.