On the road toward and beyond a bankruptcy filing, there are many dos — and even more don’ts. This isn’t because bankruptcy is a dangerous minefield that threatens to destroy people at every turn.
Rather, it’s because the amount of myths, misinformation an outright lies regarding bankruptcy is staggering. It’s even more shocking considering that we aren’t talking about vacation destinations or what kind of car to buy. Yes, there is a lot of lousy advice out there, and bad decisions are costly and stressful.
But filing for bankruptcy is an entirely different matter. Mistakes can, and often do lead to lasting damage — and in extreme cases, criminal prosecutions. And that leads us to the absolute WORST thing that some people do when filing for bankruptcy (to be fair, they are often convinced to do this by someone who they are going to hate in the near future when the mistake is discovered and the dire consequences set in).
Let’s hit the spotlight and reveal the number one thing that you — and anyone you care about — should never even think about doing, regardless of what you read or hear: run up your credit card debt prior to a bankruptcy filing.
There are two fundamental reasons why this a jaw-droppingly bad move:
It’s totally unethical.
Apologies to all of the Robin Hood fans out there, but stealing from the rich (i.e. big companies) isn’t ethical. It’s more sophisticated and may seem less harmful than walking up to someone in the street and stealing their purchase or grabbing someone’s keys and driving away in their car, but it’s essentially the same thing. Theft is theft.
It’s not going to work.
Creditors and especially court-appointed bankruptcy trustees are not stupid, and they are absolutely on the lookout for this kind of scheme. Remember, these are not cash purchases. Everything is tracked and traced, right down to the last cent.
Specifically, transactions for luxury goods or services totaling $650 or more within 90 days immediately prior to filing for bankruptcy will be presumed fraudulent. Of course, this may not be the case, but it will be up to filers to establish otherwise by demonstrating that the expenses were legitimate and necessary (e.g. getting new brakes on a car to make it roadworthy 60 days before a filing is not the same thing as buying the latest iPad a week before filing). The same presumption of guilt applies to any cash advances of at least $950 within 70 days immediately prior to filing for bankruptcy.
If filers cannot demonstrate that the transactions were legitimate and compliant, they will face the wrath of the legal system. For starters, their bankruptcy case will be dismissed. Then, creditors will go into attack mode and tack on interest penalties based on the date that the case was filed. Third, they will be prevented from re-filing for bankruptcy — and even when the ban is lifted, they may not be able to seek protection on previous debts. Lastly, they may be subject to criminal prosecution, which can lead to fines and in extreme (but not unheard of) cases, imprisonment.
The Bottom Line
If anyone is urging you to “game the system” by running up your credit cards prior to a bankruptcy filing, then consider yourself very, very fortunate that you’re reading this article now vs. after you’ve made that incredibly bad mistake. And if a friend or relative is thinking about heading down that road, send them this article and say “you’re welcome!”
To learn more contact the Law Office of Charles H. Huber. We have over 30 years of experience filing consumer bankruptcy cases.