You have decided that enough is enough. Your debt has simply gotten out of control and you have made the decision to take the plunge and file a bankruptcy and seek a fresh start to rebuild your credit and finances. However, you are concerned about whether you will be able to really walk away from your obligations to pay back your credit cards and the tens of thousands of dollars that they claim you owe them.
Many of my clients have asked me, “will my credit card company object to my bankruptcy?” Although any unsecured creditor, such as American Express, Discover Card or others may contest whether a Debtor can obtain a discharge relative to a specific debt, they rarely try to challenge a full bankruptcy. It is a debt-by-debt issue that filers must be aware of when determining the timing of their case. There are several situations where a creditor may challenge your ability to discharge their specific debt pursuant to Title 11 of the United States Code, Section 523.
The most common reason why a creditor would allege that the debt you incurred to them is non-dischargeable would be due to the timing of your bankruptcy as it relates to the last use of your credit card or amount put on the card. It is called an “abuse of the bankruptcy process due to the intent of the use of a credit card”. More specifically, timing of your bankruptcy is important because pursuant to 11 USC §523(a)(2), a debt is presumed to be nondischargeable if a Debtor charges more than $600 for luxury goods on a credit card with in 90 days, or takes cash advances of more than $875 within 70 days of filing for bankruptcy. This presumption can be rebutted, but the burden is on the debtor to prove that the purchases did not involve luxury goods or services.
Another reason a creditor may object to your discharge is fraud and misrepresentation of your assets in order to obtain credit. If you misrepresent your financial condition in order to obtain a loan or credit line, and your creditor relies upon your misrepresentation when agreeing to extend credit, the creditor can object. For example, you earn $35,000 a year, but in order to get an Amex credit line of $10,000, you put on your credit application that you earn $100,000 a year.
Hiding an asset or failing to disclose it in a bankruptcy proceeding are also grounds to challenge a Debtor’s discharge. For example, if you own an investment property, especially one with equity, which could not be protected under the Bankruptcy Code, and fail to inform the Court of this asset, then a Creditor may challenge your right to a discharge pursuant to 11 U.S.C. §727.
Finally, the transfer of ownership of valuable items to family members or others just before filing bankruptcy can cause a creditor to challenge the bankruptcy case. It is particularly a problem if the asset you transferred would not have been fully exempt (meaning you could not protect the full value from liquidation), and the transfer was made with the intent to deprive a creditor of a benefit. If you do this, either your bankruptcy Trustee or any creditor who might have received a benefit from the sale of this asset may allege you committed a fraudulent transfer of an asset. The Federal look-back period (11 U.S.C. §548) of any asset transfer is two years, but each state has their own period. For example, in Massachusetts, a Trustee may look back up to four years. (Note from Bret: the Wisconsin look-back period is also four years.)
With the foregoing in mind, I always advise my clients to stop using any credit cards at least 90 days prior to filing for bankruptcy. But sometimes, due to a foreclosure or some other court preceding that requires the automatic stay provisions, you simply cannot wait. If this is the case, your attorney will need to work out a deal with the Trustee and your creditor. So long as you have been honest with your creditors and did not lie to obtain the money that is now the noose around your neck, you should be fine. However, as with anything in the law, it is always advisable to discuss your matter with an experienced bankruptcy lawyer in your state before making any final decisions.
Image credit: Images_of_Money/flickr
I would add a point about dischargeability complaints. They cost money to defend. The fee contract I enter into with my clients covers my work in preparing and managing a Chapter 7 from filing through discharge. It does not cover my time for defending a dischargeability complaint. Bankruptcy litigation is expensive (my retainer for this type of litigation starts at $2,000) so if I see a situation where such a complaint is likely to be filed, I will encourage my client to decide what he intends to do prior to filing.
Good point. I also warn my clients about potential dischargeability actions. Sometimes, if you’ve got bad facts, it makes more sense to stipulate to nondischargeability.
Thanks for reading, Jonathan!
During the late 1990’s, two creditors lawyers began filing many dischargeability AP’s against hapless debtors. Many of these debtors were represented by the same debtors’ lawyers. Not all of the high volume guys, most of the AP’s were against 2 – 3 lawyer’s clients with a high enough frequency to be disproportionate and indicate that these lawyers probably failed to adequately emphasize the consequences of recent charges, etc. Eventually, the wiser debtors’ counsel zealously defended the discharge AP’s and shifted fees using a Florida statute which makes one-sided contractual attorney fee provisions reciprocal. A few states other than Florida have similar attorney fee statutes. Works wonders in helping debtor’s counsel fight creditor’s “strike” suits.
Good point. Consumers need to be advised by their counsel that recent charges may prompt complaints by certain banks. However, most debtors’ attorneys will defend against baseless suits and will negotiate with those creditors who have colorable nondischargeability claims.
Thanks for weighing in!