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Archive for the ‘Pre-bankruptcy Planning’ Category

Disadvantages of a Badly-Timed 5-Year Chapter 13 Case

December 31st, 2018 at 8:00 am

Following up on last week’s scenario, here are the financial, credit record, and other disadvantages of a forced 5-year Chapter 13 plan.   

 

Our last two blog posts were about how the last 6 calendar months of income of a person filing a Chapter 13 case can determine whether his or her Chapter 13 payment plan lasts only 3 years or instead a full 5 years. We showed how even relatively small shifts in income can cause this huge difference.

The last blog post gave a scenario illustrating how this would work in a real-life situation. It showed how under certain circumstances one person would have a 3-year payment plan if he or she filed a Chapter 13 case in January but a 5-year plan if filed in February.  Today we look at the financial and other consequences of this difference, and some other practical considerations.

Filing a Chapter 13 Case in January vs. February 2019

Our scenario involved a person receiving an extra $2,500 in income in January 2019 from a temporary holiday job. (That’s in addition to the $3,000 every month from the person’s regular job.) Because of the way income is calculated, that $2,500 would push this person over the median family income threshold, but only IF that income is counted. Filing the Chapter 13 case in January would result in that extra $2,500 NOT being counted. That’s because you count only the last 6 FULL CALENDAR MONTHS’ income (and double that for the annual amount). Those 6 months with a January filing are July through December 2018. You DON’T count the income of the month you’re filing the case—in this situation, January.

When filing the Chapter 13 case in February you DO COUNT the extra $2,500 in determining the plan’s length. That’s because the last 6 full calendar months are then August 2018 through January 2019, including the $2,500.

Financial Consequences

Our scenario assumed that your budget requires you to pay $300 per month into your Chapter 13 plan. If you have to pay that for 5 years instead of 3, that’s 2 more years of payments. 24 months of $300 payments totals $7,200. That’s a lot of extra money to pay just because you happened to file your Chapter 13 case in February instead of January.

That could potentially include filing the case just one day later—February 1 instead of January 31. Again, that’s because when filing on February 1 you must include January’s income—including the extra $2,500. When filing on January 31 you don’t include January’s income, avoiding that very troublesome $2,500.

Of course if your monthly Chapter 13 plan payment would be larger than $300, the extra money you pay will be that much more. For example, a $500 monthly plan payment would mean an extra $6,000 paid during the extra two years.

In addition, the longer your case lasts the more likely that your income would increase during your case. That may well require you to increase your monthly plan payment. That would result in you paying that much more during the final two years.

For example, assume you’re paying $500 per month into your payment plan from the beginning of your case. After 3 years you get a new job or a promotion increasing your income by $300 per month. If you had a 3-year plan (based on your initial income calculation) you’d be finishing your Chapter 13 case then. You’d pay nothing more into the payment plan; you’d get to keep all your income, including the pay increase.

Instead, if you’re in a 5-year plan you’d have two more years to go. You may well have to increase your $500 plan payments by $300 to $800 monthly. $800 per month for the final two years would mean an additional $19,200 paid to your creditors. And this could happen merely by filing your case with unwise timing!

Credit Record Consequences

These financial consequences of a longer case are bad enough. But the intangible consequences could be pretty bad as well.

Having your case last 2 years longer means 2 more years before you can really rebuild your credit. To some extent you may be able to build some positive credit history DURING a Chapter 13 case. That can happen if as part of the case you’re making regular contractual payments on your home or vehicle. But you’re still in the midst of a bankruptcy case, which harms your credit record. The sooner you complete your Chapter 13 case the better for credit purposes.

Two extra years in your case means that much longer before you’re free of the Chapter 13 trustee’s supervision. That likely means two more years that the trustee can take your income tax refunds to benefit your creditors. And, as described above, that’s two more years that increases in income could go, partly or fully, to your creditors.

Also, it’s 2 more years of the risk that you won’t finish your case successfully. To get some of the most important benefits of a Chapter 13 case you must complete it.  The longer a case lasts the more opportunities for things to happen that jeopardize a successful completion.

Lastly, being in a Chapter 13 case can be emotionally challenging. You wouldn’t be in it unless it was providing you significant financial benefits. (For example, saving your home and/or your vehicle(s), paying your income taxes or child support while protected from these creditors.) But you are in a sort of financial limbo. It feels very good to finish it and get it over with. You definitely want to do so in 3 years instead of 5 if you can.

 “Three-Year Plans” that Last Longer

One last thing: a Chapter 13 plan that is allowed to be finished in 3 years may last longer. Your income may allow you to have a 3-year plan but you can chose to have it last longer. The law provides that the bankruptcy “court, for cause,” may approve a length up to 5 years.

Many things that could push your allowed-to-be-3-year plan to be longer. You may want to pay for something—a home mortgage arrearage or priority income taxes, for example—and need more time to do so within a reasonable budget. So your plan may last up to 5 years in order for it to accomplish what you need it to.

IF this applies to you, being required to pay for 5 years because of your income may not be a practical disadvantage. On the other hand, you certainly don’t want to stumble into a 5-year Chapter 13 case simply because you didn’t time it well.

Talk with an experienced and conscientious bankruptcy lawyer to learn where your own unique circumstances puts you in all this.

 

Scenario: Filing Chapter 13 Now Shortens a Case by Two Years

December 24th, 2018 at 8:00 am

Here’s a scenario showing how the timing of your Chapter 13 filing can shorten your payment plan from 5 years to only 3. 

 

In our last blog post we explained how your last 6 calendar months of income can determine whether your Chapter 13 payment plan lasts 3 years or instead 5 years. We showed how even relatively small shifts in the money you receive can cause this huge difference.

How this can happen will make more sense after reading through the following scenario.

Our Facts about “Income”

Remember from last time that your “income” includes money from just about all sources, except Social Security. Also, the only money that counts is that which you received during the 6 FULL CALENDAR months before filing. This means that money received DURING the calendar month of filing DOESN’T count. For example, if you file your Chapter 13 case on January 31 you count the income from the previous July 1 through December 31. You don’t count any income received in January.

In our scenario assume you worked a second job during the holidays. Your monthly paycheck for December from this job is arriving on January 4, 2019. The anticipated gross income amount is $2,500. This money could also come from just about any other source. For example, your ex-spouse may be able to catching up on some unpaid child support owed because he/she received an annual bonus. It could be from just about any source. The point is that there’s an extra $2,500 arriving in early January.

In addition you receive $3,600 gross income every month from your regular job.

You received no money from any sources other than your regular job from July 1, 2018 through December 31, 2018. You expect to receive no money in January 2019 other than the $3,600 gross income and the additional $2,500.

So, assume that your bankruptcy lawyer files your Chapter 13 case between January 1 and January 31, 2019. The income that counts is what you received during the 6 prior full calendar months. That’s from July 1 through December 31, 2018. That is $3,600 per month times 6 months, or $21,600, or $43,200 for the annualized amount.

Our Facts about “Median Family Income”

Your income, as just discussed, determines whether your minimum payment plan length is 3 vs. 5 years. If your income is less than the designated “median family income,” your minimum plan length is 3 years. If your income is the same as or more than “median family income,” your minimum plan length is 5 years. Section 1322(d) of the U.S. Bankruptcy Code.

The “median family income” amounts (Section 39A of the Bankruptcy Code) come from the U.S. Census Bureau. This source data is adjusted annually, and is also adjusted more often to reflect changes in the Consumer Price Index. (The CPI comes from the U.S. Bureau of Labor Statistics.) The U.S. Trustee conveniently gathers this information at this webpage. From there the most recent median family income amounts (as of this writing) are compiled in this table.

For our scenario assume that you are single and live in Kentucky. According to the above table the median family income for a single person in Kentucky is $44,552. (You can find your own median family income by finding your state and family size in the table.)

Filing a Chapter 13 Case in January 2019

Under the facts outlined above, if you filed a Chapter 13 case during January 2019, your case could last 2 years less than if you filed the case in February, conceivably just a few days later.

Why? Because if you file in January you don’t count the income from that month. That means that you don’t count the $2,500 in income from the holiday job. You only count the $3,600 per month you received July through December from your regular job. As calculated above, that means an annualized income of $43,200. That is less than the applicable median family income amount of $44,552. So you’d be allowed to have a Chapter 13 payment plan that lasts only 3 years, and not be required to pay for 5 years.

Filing a Chapter 13 Case after January 2019

But if you file in February 2019 (or any of the following 5 months) your Chapter 13 plan would be required to last 5 years.

Why? Because if you file in February (or during the next 5 months) you do count the income from that month. That includes the $2,500 in income from the holiday job. When filing in February, for example, you count the income from August 1, 2018 through January 31, 2019. That includes the $3,600 per month from your regular job, plus the $2,500 from the holiday job. Six times $3,600 is $21,600, plus $2,500 equals $24,100. Multiply this by 2 gives you an annualized income of $48,200.

That is more than the applicable median family income amount of $44,552. So you’d be required to pay into your Chapter 13 plan for a full 5 years.

Next week we’ll discuss the financial and other consequences of this, and some other very important considerations.


An Example of a “Preference”

December 10th, 2018 at 8:00 am

A “preference” makes more sense when you see an example. Here’s one. This also helps explain how to avoid creating one. 

 

Last week we explained why paying a creditor before filing bankruptcy could cause problems during bankruptcy. That’s especially true if the creditor you pay is one that you have personal reasons to favor. We explained the circumstances in which such a payment might possibly be considered a “preference,” or a “preferential payment.”  If so, your favored creditor could well be required to return the money you paid, except not to you but rather to your bankruptcy trustee, for distribution to your creditors in general.

We ended last week saying we’d next give you an example of a preferential payment made during the holidays, and practical ways to avoid it.

Our Holiday Example

Imagine that you owe your sister $3,000 for loaning you this money in 2016 to pay your mortgage (or rent). Nothing was put in writing, and you didn’t have to pay interest. But you and your sister agreed that you had to pay it back. Now she’s unexpectedly getting a divorce and she really needs the money. You’re planning on filing bankruptcy early in 2019. You’ve stopped paying most of your other creditors and are making extra money from a part-time job during the holidays. So you now have the $3,000 to pay her back.  

Here’s what would likely happen if you paid her now and then filed a bankruptcy case within a year of doing so.

A month or two after filing bankruptcy the bankruptcy trustee would very likely demand that your sister pay $3,000 to the trustee.

The $3,000 would likely be considered a preferential payment because it was:

  • made within 365 days before the bankruptcy filing
  • to an “insider,” which includes a “relative” (or within 90 days NOT to an “insider”)
  • while you were “insolvent”—essentially had more debts than assets
  • resulting in the sister getting more than she would in a Chapter 7 distribution of your assets  (usually just meaning more than getting nothing)

Assuming the payment meets these requirements of a preference, if your sister didn’t pay the bankruptcy trustee the demanded $3,000 the trustee would likely sue her to make her pay. Once the trustee got that $3,000, it would be divided among your creditors according to a set of “priority” rules. Your sister may receive nothing from this distribution, or likely only a small portion of the $3,000 you owed. Your effort at helping her would likely have seriously backfired.

Avoiding this Unhappy Result

You can avoid this preferential payment problem simply by not paying your sister anything during the year before filing bankruptcy. (This includes either money or anything else of value.)

Instead talk with your bankruptcy lawyer about how to best protect the $3,000 that you’ve scraped together. And then pay your sister after your bankruptcy case is filed. If you’re filing a Chapter 7 “straight bankruptcy” case, that may mean a delay of only a few weeks.  

If you’ve already made the payment to your sister discuss this as soon as possible with your lawyer. If may or may not be possible to undo this payment. If so, that may solve the problem. If not, it may make sense to wait for a year to pass from time of the payment to your filing.  (Or you may need to wait only 90 days if the person you paid does not qualify as an “insider.”)  Either way, in some circumstances it may not make sense to wait. Your lawyer will help you weigh your options.

Finally, what may seem like a preferential payment may in fact not be one. For example, if instead of paying your sister you paid your ex-spouse to catch up on a child support obligation, there’s a good change that would not be a preferential payment.

So again, talk with your lawyer right away if you think you may have made a preferential payment. Or preferably do so before you pay a creditor, in order to prevent doing what may not be in your best interest.

 

“Preferences” Around the Holidays

December 3rd, 2018 at 8:00 am

Do you feel like you should pay on or pay off a certain debt now, even though you’re behind on all your debts?  It may be dangerous to do so. 

 

Last week we explained how giving a significant gift before bankruptcy could cause problems during bankruptcy. This also applies to selling something for much less than it is worth. Such a gift or sale might possibly be considered a “fraudulent transfer.”

A similar problem could arise from paying a creditor before you file bankruptcy. That’s especially true if it’s somebody you want to favor or maybe don’t even see as a regular creditor. This payment might possibly be considered a “preference,” or a “preferential payment.”  This is today’s topic.

Your Desire and Ability to Pay a Special Creditor

Especially around this time of year you may be extra motivated to pay on or pay off a special debt. A relative, or a friend, may really need of the money. He or she may be pressuring you to pay.

You might be thinking about filing bankruptcy and you don’t want it to affect this person. So you pay him or her off thinking that would help. Or you do so because you don’t want the person to know about your bankruptcy, for whatever personal reason.  

Besides wanting to, you may be able to pay on a special debt this time of year more than usual. For many people because of the expenses of the holidays money is especially tight. But, as mentioned a couple weeks ago:

The month of December is the month that people receive more income than any other month of the year. [F]or at least the past 9 years U.S. personal income was the highest in December… .

You may be getting a bonus from work or more income from working extra hours or part-time job during the holidays. So you might be able to pay a special debt now more than at any recent time.

So you may have the desire and ability to pay a debt now, before filing bankruptcy. But it may not be a smart thing to do.

What Makes a “Preference”?

If during the 365 day-period BEFORE filing a bankruptcy case you pay a creditor more than you are paying at that time to your other creditors, then AFTER your bankruptcy is filed that favored creditor could be forced to surrender to your bankruptcy trustee the money that you’d paid to this creditor earlier. See Section 547(b) and (c) of the U.S. Bankruptcy Code. 

This one-year look-back period is shortened to only 90 days for creditors that are not “insiders.” The Bankruptcy Code defines “insiders” basically as relatives and business associates, but the definition is open-ended. See Section 101(31). So it could include friends and just about anybody that you have a personal reason to favor. Your bankruptcy lawyer will advise you whether a potential preferential payment was to an insider or not.

Your favored creditor could be required to return the money (or other form of payment) that you’d paid. The money would usually not be given to you but to your bankruptcy trustee. The trustee would then distribute it among your creditors.

The result: instead of satisfying your favored creditor as you’d intended, you could have an unhappy one. This is not.

What’s the Point of All This?

Preference law is related to one of the most basic principles of bankruptcy—equal treatment of legally similar creditors. People or businesses which are financially hurting must be discouraged from favoring any of their creditors before filing bankruptcy. Otherwise they would—the theory goes—pay all of their last money or other resources to their favored creditors, leaving nothing for the rest of the creditors. Under preference law, if they do so within the 365-day/90-day look-back periods, those payments made to the favored creditor could be taken back from that creditor. This disincentive is supposed to make the situation fairer to all the creditors.

“Preferences” Can Be Frustrating, But They’re Avoidable

“Preferences” are relatively rare problems in consumer bankruptcy cases, partly because they are relatively easy to avoid. Next week we’ll give you a scenario showing a potentially preferential payment made during the holidays, and practical ways to avoid it.

 

Bankruptcy Timing and the Holidays: Filing in January to Qualify for Chapter 7 or Shorten Chapter 13 Case

December 28th, 2015 at 2:00 am

Think about filing bankruptcy in early 2016 if you had some extra source of money in mid-2015.

 

Some people can take advantage of the peculiar way that bankruptcy law calculates “income” for purposes of the “means test” by filing their Chapter 7 case with the right timing. Doing so could qualify them for Chapter 7 when otherwise you may not.

Others can take similar advantage of the way “income” is calculated for purposes of determining their Chapter 13 “commitment period”—the minimum length of time they have to pay into their court-approved payment plan. With the right timing their commitment period would be 3 years instead of 5 years.

Today, after reminding you briefly how “income” is calculated for these two purposes, we’ll give you an example how a January bankruptcy filing could save you a great deal of money.

The Purposes of the “Means Test” and “Commitment Period“

The “means test” determines to a large extent whether you can file a Chapter 7 “straight bankruptcy,” lasting only about 4 months, or instead must file a Chapter 13 “adjustment of debts,” which usually lasts 3 to 5 years.  The means test is intended to figure out if you have the “means” to pay your creditors a meaningful portion of what you owe. If so, then you would be required to do so through Chapter 13 instead of just quickly discharging (legally writing off) the debts through Chapter 7.

The “commitment period” calculations determine, as mentioned above, whether your Chapter 13 payment plan must run 3 years or instead 5 years. If the latter, that can mean paying thousands of dollars more to your creditors. It can also mean delaying when you can start repairing your credit.   

“Median Income”

The “median income” for your family size in your state is similar but not the same as the average income. Median income is the amount at which half the people for your family size in your state have income of less than that amount and half have more than that amount.

The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. For cases filed November 1, 2015 and for several months thereafter, those state-by-state amounts can be found here.

Qualifying for a Chapter 7 case by passing the means test turns to a large extent on whether your “income” (as calculated for this purpose) is no more than the “median income” for your family size in your state.

Qualifying for a 3-year Chapter 13 case (instead of a 5-year one) turns effectively on whether your “income” (calculated the same as for the means test) is no more than the “median income” for your family size in your state.

The Calculation of “Income”

For these two purposes “income” is calculated as follows: first, virtually all money received is included, not just taxable employment income (except for Social Security); and second, that money received is counted only during precisely the last 6 FULL calendar months before the date of filing bankruptcy. This means EXCLUDING any money received at any point BEFORE that that six-month period.

So sometimes it makes a huge difference to wait to file bankruptcy until more than 6 months has passed after you receive some money that pushes you above the median income amount.

An Example

Here’s how this works.

Consider Henry, living alone, in a state in which the applicable median income is $48,000 for a family of one. He received a salary of $3,900 per month through all of 2015, each paid on the last day of the month. That totals $46,800 for the year.

Henry also received a mid-year bonus from his employer in the amount of $2,500 on June 30, 2015.

If he filed a bankruptcy case anytime in December 2015, Henry’s “income” would be calculated as follows:

1) the six full calendar months for counting “income” would be June through November 2015 (June 1 through November 30);

2) employment income during that time was $3,900 times 6 months = $23,400;

3) add the $2,500 IRA contribution, for a total of $25,900 in income during that 6-month period;

4) multiply the $25,900 by 2 for an annualized income amount of $51,800;

5) since that is more than the applicable $48,000 median income for Henry’s family size in his state, he does not pass the income portion of the “means test” so he may not qualify for Chapter 7; if he filed a Chapter 13 case he could not do a 3-year payment plan but would rather have to pay for 5 years.

However, just as soon as January arrives, Henry’s “income” becomes less than the $48,000 median income amount. Here are the calculations:

1) the pertinent six-month period moves ahead by a month, so now it would include July 2015 through January 2016 (July 1 through January 31);

2) employment income during that time was the same $3,900 times 6 months = $23,400;

3) Don’t include the bonus received on June 30, 2015 because that’s now outside the six-month period;

4) multiply $23,400 by 2 for an annualized income amount of $46,800;

5) since that is less than the applicable $48,000 median income, now Henry has less “income” than the median amount.

As a result, by waiting to file his bankruptcy case not in December 2015 but rather in January 2016, Henry can much more easily qualify for Chapter 7 by passing the “income” portion of the “means test.” And if he chooses to file a Chapter 13 case instead, the minimum length of his payment plan would be 3 years instead of 5 years.

 Notice that under these facts Henry could wait literally just one day, from December 31 to January 1, for the big difference described here.

 

Bankruptcy Timing and the Holidays: The “Cash Advances” Presumption of Fraud

December 14th, 2015 at 2:00 am

If you can, don’t do cash advances during the holidays if you’re contemplating filing bankruptcy. If you do, understand the rules about them.

 

In our last blog post we explained the “luxury” presumption of fraud. This provision in bankruptcy law increases the risk that you would not be able to “discharge” (legally write off) a very particular kind of debt. That kind of debt would be one that resulted from a purchase or a set of purchases totaling more than $650 made during the 90 days before filing bankruptcy.

The “cash advances” presumption of fraud is closely related to the “luxury” one. The dollar amounts and timeframe are just a little different. This “cash advances” presumption increases the risk that you would have to pay a debt tied to a cash advance or set of cash advances totaling more than $925 made during the 70 days before filing bankruptcy. (Notice that for this presumption to kick in, you incur somewhat more credit in a somewhat shorter period of time than with the “luxury” presumption of fraud.)

The Risk of Doing Cash Advances Shortly Before Filing Bankruptcy

We keep talking about the increased risk of not discharging a debt. What do we mean by this?

We mean that you could very well still discharge a debt from a cash advance done within the 70 days and more than $925. There’s just a greater risk that you couldn’t. Let us explain.

First, if you happen to do a cash advance of more than $925 (or a series of them with the same creditor) within the 70 days before filing bankruptcy, you may not have to pay that debt. That’s because you will not have to pay it unless a creditor complains about it, and does so within a deadline which is about 100 days after your bankruptcy case is filed. If you list the creditor in your bankruptcy case and it doesn’t complain within the deadline, that cash advance debt would simply be written off.

Second, the creditor may file a formal complaint and do so on time but that doesn’t mean it will win. A cash advance within the 70 days and exceeding $925 only creates a presumption that you didn’t intend to pay that debt. That presumed intent can be defeated by evidence showing that you did actually intend to pay it at the time you did the cash advance(s).

Third, you can avoid this “cash advance” presumption altogether by simply waiting to file your bankruptcy case until at least 71 days after the (latest) cash advance.  Then the creditor gets no presumption of fraud and actually has to come up with evidence that you didn’t intend to pay the cash advance debt. Without some evidence it can’t file a complaint (although the evidence could be circumstantial, such as you not making any payments on the account after the cash advance indicating lack of intent to pay it).

The Risk of Doing Cash Advances More than 70 Days before Filing Bankruptcy

Even a cash advance done outside the 70-day presumption period comes with some risk that this cash advance debt would have to be paid. The creditor just has to have evidence that you didn’t intend to pay the debt, no matter when the debt was incurred.

Two Practical Truths about the Advantage of Presumptions of Fraud

Beyond anything written in the law, here’s why the “cash advance” presumption of fraud (and the “luxury” one as well) works in favor of creditors:

1) The presumptions allow creditors to win without any evidence of fraud in cases where the debtors don’t respond to the creditors’ complaint. Because debtors who file bankruptcy not represented by an attorney are much more likely to not respond, some creditors are more inclined to file these complaints in those unrepresented cases. When the debtor does not respond on time, the creditor gets a judgment by default against the debtor.

2) When a debtor does respond (generally through his or her attorney) to a creditor’s complaint, the matter is often settled with the creditor getting paid at least something out of the cash advance at issue. That’s because the high cost in attorney time compared to the relatively small amounts usually at issue often makes fighting the complaint much more expensive than just quickly settling it.

Because of these two practicalities, the presumptions of fraud gives creditors more motivation to file complaints whenever there is a cash advance exceeding $925 during the 70 days before a bankruptcy filing, even without much indication that the debtor didn’t intend to pay that debt at the time.

The Bottom Line

The presumption only gives a modest legal leg up. But the practical advantage is significant. So whenever possible it’s usually worth waiting to file your bankruptcy case until after the 70-day “cash advance” presumption of fraud period (and the 90-day “luxury” one as well) has passed.

 

Bankruptcy Timing and the Holidays: The “Luxury” Presumption of Fraud

December 11th, 2015 at 8:00 am

If you’re considering filing bankruptcy, try to avoid using credit cards to finance the holidays. But if you do, there are some extra risks.

 

Using Credit Shortly Before Filing Bankruptcy

Using credit during the holidays if you’re contemplating bankruptcy is dangerous. It could be considered fraud if you run up debt that you don’t intend to honor.

What is “Fraud” in Bankruptcy?

The bankruptcy system rewards honesty. One of the core principles in bankruptcy is that debts which are entered into honestly can later be written off, while debts entered into through cheating cannot.

When you incur a debt, you are agreeing to pay the debt. If at the time you are incurring a debt you actually don’t intend to pay it, that would be cheating. Falsely saying or implying that you intend to pay the debt would be a misrepresentation and likely a fraud. There is a risk that such a debt would not be written off (“discharged”) in bankruptcy.

Charging on a Credit Card

Credit card debts are usually discharged without any problem in bankruptcy. But if you made a misrepresentation to a creditor in order to get the credit card in the first place, or used the card without intending to pay for those purchases, that creditor could challenge your ability to get its debt discharged.

Using false information to get a new credit card account is relatively rare. It’s not hard to understand that doing so is wrong, that it’s behavior that shouldn’t be rewarded by the discharge of that debt.

But for various reasons buying something on a credit card even when you’re considering bankruptcy, seems different, because:

  • Your actual intention at the time you make the purchase could genuinely be quite vague—maybe you’ve not actually decided to file bankruptcy, are hoping to pay the debt, but are feeling pretty hopeless about ever being able to.
  • You figure the particular purchase is relatively small, so one way or the other it’s not a big deal.
  • You may be using the credit card by force of habit, and not even thinking much about whether you can pay it.
  • You may be quite desperate, very much needing to make the purchase regardless of your ability to eventually pay for it.

For these kinds of reasons it’s not uncommon for people to use credit cards not long before filing bankruptcy. And although creditors don’t always object in these situations, they do so probably more than in any other kind of “fraud” situation.

What’s a “Presumption of Fraud”?

One of the reasons that creditors are more prone to object to the discharge of recent credit card charges is that bankruptcy law helps them do so. The law does so through a “presumption of fraud” for “luxury” purchases.

Bankruptcy law accepts the reality that it’s not easy for a creditor to determine your intent at the moment you make a purchase. It’s often not easy to prove in court that you didn’t intend to pay a debt at that point.

So the law gives the creditors an advantage. Under certain very specific circumstances involving the timing and amount of the purchase, the law will presume that you made a purchase without intending to pay for it. The creditor doesn’t necessarily need to establish through evidence what your actual intent at the time was.

What’s the “Luxury” Presumption of Fraud?

Specifically, if you buy more than $650 in “luxury goods or services” from any single creditor during the 90-day period before your bankruptcy is filed, that debt is presumed to not be discharged. The presumption applies not to the entire balance of the debt but only that part incurred during that 90-day period.

Be careful because “luxury” is defined much more broadly than normal—“luxury goods and services” includes everything other than those “reasonably necessary for the support or maintenance of the debtor or a dependent.” That could include virtually anything that isn’t an absolute necessity.

The Presumption Can Be “Rebutted”

Once the creditor “raises the presumption” by alleging the necessary facts to fit within the presumption, you can respond by “rebutting the presumption.” The presumption is only a presumption, it’s not proof. The creditor can win with only the presumption of fraud if you don’t push back. But if you do have the right facts you can defeat the presumption and not have to pay the debt.

 So if you made a purchase or purchases exceeding $650 within the 90 days and the creditor complains about it to the bankruptcy court, if you in fact HAD intended to pay the debt at the time you made the purchase you would respond to the court about your honest intent. You and your attorney do this through your own direct testimony about your intent and/or by establishing other relevant facts, such as what happened in your financial life after you made the purchase(s) which subsequently convinced you to file bankruptcy.

The Debt is Discharged Unless the Creditor Complains

Even if the timing and dollar amount would mean that one of the presumptions would apply, that debt is still discharged if the creditor does not make a formal complaint about it. This is true no matter how good or bad your intention was at the time you made the purchase(s). The reality is that creditors often don’t bother complaining, usually because the amount at issue is too small to justify them incurring more expenses to make you pay it.

The creditor’s complaint must be made on time. The deadline for creditors to complain is a quick one—60 days after your “meeting of creditors”—so usually within about three months after your case is filed. After this deadline passes the creditors can no longer raise objections, so at that point you no long need to be concerned about it.

Fraud Can Be Proved Without the Presumptions

Don’t assume that purchases that you make earlier than this 90-day period necessarily mean a creditor could still complain. The presumptions just give the creditors a procedural advantage. But they are free to try to prove a misrepresentation or fraud no matter when it happened.

For example, if someone paid for an $8,000 vacation cruise on a credit card, and then filed a bankruptcy case 91 days later, the 90-day presumption of fraud wouldn’t apply. But the creditor would nevertheless likely be able to put together evidence to convince a bankruptcy judge that more likely than not that the person didn’t intend to pay that new $8,000 debt. If the person didn’t make a single payment on the account after that $8,000 charge, was already insolvent before making that charge, and didn’t experience any new financial setbacks between then and filing bankruptcy 91 days later, these could potentially be enough circumstantial evidence that the person was not expecting to pay for that cruise.

During the Holidays

So if you can, avoid using credit if you are considering bankruptcy. For the same reasons you should not finance the holidays on whatever credit you may have available. Doing so can result in the new debt not being written off when you do file a bankruptcy case, or may affect its timing.

But in any event, and especially if you’ve already used credit recently, see a bankruptcy attorney as soon as you can to determine what’s in your best interest. You’ll learn what you do and don’t need to be concerned about, and how to best posture and time the filing of your bankruptcy case to meet your needs.

 

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