Tag Archives: debt

BANKRUPTCY: CREDIT CARD TRANSACTIONS FRAUD? IT’S A MATTER OF TIMING

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Some types of debts cannot be discharged in bankruptcy.  These include income tax, child support and student loans.  Then there are other types of debts that should be dischargeable in bankruptcy, but become non-dischargeable because of how the debt was incurred.  For example, debtors that obtain money, property, or services through fraud remain liable for these debts after they receive their discharge.

 

To have a debt determined to be nondischargeable due to fraud, a creditor must show:

 

  1. The debtor made false representations to the creditor;
  2. The debtor knew the representations were false;
  3. The debtor made the representations with the intent of deceiving the creditor;
  4. The creditor relied on the representations; and
  5. The creditor sustained a loss as a result of the debtor’s misrepresentations.

 

It appears from the list above that fraud should be difficult to prove.  It’s actually surprisingly simple in cases involving credit card debt.  Debtor’s use of a credit card is often treated as an implied representation to the credit card company that the cardholder intends to pay the charges incurred.  AT&T Universal Card Servs v. Mercer 246 F.3d 391, 404 (5th Cir. 2001).  Since the debtor’s use of the credit card is a representation to the company that the cardholder intends to pay the charges, the biggest hurdle for the creditor to proving fraud is establishing that the debtor had no intention of repaying the debt.  Courts will consider many factors when determining if a debtor had no intention of repaying the debt, including the time between use of the card and the bankruptcy filing, debtor’s financial condition when the card was used, whether the card was used for luxuries or necessities, and whether the debtor consulted with an attorney about bankruptcy before incurring the debt.

 

As a general rule, debtors should not use a credit card during the six month period prior to filing bankruptcy.  Additionally,  debtors should not use a credit card once they make a decision to file bankruptcy or realize they will not be able to repay the debt.  Debtors who do not follow this advice risk being sued in bankruptcy court and having their debts declared nondischargeable.

BANKRUPTCY: CROSS-COLLATERALIZATION AND CREDIT UNIONS

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In bankruptcy, debtors often wish to discharge their unsecured debt but keep their secured collateral.  This is generally allowed in bankruptcy, but a practice commonly employed by credit unions makes this process more complicated and often more expensive.  The reason is because credit unions often include cross-collateralization clauses in their loan documents.  Cross-collateralization means that the collateral for one loan is also used as the collateral for another loan.  This means that when you obtain an auto loan from a credit union, and also have a credit card through the same credit union, your credit card which is usually an unsecured debt may be partially or fully secured by your car.  It is best to avoid the possibility of cross-collateralization by not taking out multiple loans or lines of credit with the same credit union.  Traditional banks do not use cross-collateralization clause in their loan documents.

If you are unsure whether your loans are cross-collateralized, and/or need advice regarding how your debts will be affected by bankruptcy, contact The Wright Firm, L.L.P.

DOMESTIC SUPPORT OBLIGATIONS GIVEN PRIORITY IN BANKRUPTCY

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The Bankruptcy Code provides special protection for parties’ owed domestic support obligations, such as child support, alimony, and spousal maintenance.  In its present form, the Bankruptcy Code provides that domestic support obligations cannot be discharged in a Chapter 7 case and receive priority status in Chapter 13 bankruptcy plan.  This priority status guarantees that domestic support obligations are among the first debts to be paid, and creditors owed this type of debt are entitled to be paid in full in a Chapter 13 plan.

 

I would like to take a moment and discuss an issue that affects those people who are owed a domestic support obligation by someone who has filed Chapter 13 bankruptcy.  In this article, I’m going to refer to the person owed the debt as the “creditor” and the person who owes the debt as the “debtor.”  As discussed above, the creditor is entitled to be paid in full in the Chapter 13 plan.  However, it is not always wise to require the debtor to repay the entire debt in the bankruptcy.  In order for a Chapter 13 bankruptcy case to be successful, the debtor has to prove that they have enough income to pay their household expenses plus their Chapter 13 plan payment.  If a debtor cannot show that their income is sufficient to pay these expenses, then the bankruptcy court will eventually dismiss their case depriving the debtor from the relief offered by a discharge.

 

In some instances, a debtor may owe so much in domestic support obligations, that they have no hope of making a Chapter 13 plan payment and still paying their other bills.  In these cases, if the debtor is required to pay their entire domestic support obligation, they will not be able to continue in bankruptcy.  The creditor should consider how the debtor’s other debts affect their financial situation.  If a debtor has substantial credit card debt, medical bills, or other debts, they may be behind on their child support, alimony, or spousal maintenance because they are financially overwhelmed by these other debts.  In this situation, the creditor should consider allowing the debtor to pay less than their entire debt in the Chapter 13 plan.  This will allow the creditor to receive partial repayment of what they are owed and allow the debtor to receive a discharge of their other debts.  Once these debts are discharged, the debtor will be in a better position to repay the remainder of the domestic support obligation.  Don’t forget, the domestic support obligation is not dischargeable, so allowing partial repayment in the Chapter 13 plan doesn’t mean that the creditor will not be paid in full eventually.  Sometimes accepting less than full payment of a domestic support obligation in a bankruptcy plan is the best way for a creditor to ensure that they will be paid.

FILING BANKRUPTCY MAY IMPROVE YOUR CREDIT RATING

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Many people do not file bankruptcy because they fear that it will ruin their credit score.  The reality is that by the time most people start thinking about filing bankruptcy, they already have a poor credit rating, and for those people, filing bankruptcy may in fact improve their credit rating.

There are several reasons why debtors who file Chapter 13 bankruptcy may notice that their credit rating improves soon after filing bankruptcy.  First, Chapter 13 bankruptcy reorganizes debts through a plan that allows repayment of a portion or all of the person’s debts in a way that they can afford.  By making payments on time, debtors begin to improve their credit score.  Second, many debtors file Chapter 13 bankruptcy in order to stop foreclosures.  A Chapter 13 bankruptcy filing looks much better on a credit report than a foreclosure.  It indicates to creditors that the debtor is trying to repay their mortgage arrears, rather than simply defaulting on their mortgage loan.

 

Chapter 7 bankruptcy will usually improve a debtors credit rating as well.  Chapter 7 bankruptcy cases are generally completed within four or five months after filing the case.  After the debtor receives a discharge, their credit report is largely wiped clean, and the records of unpaid debts and late payments are removed from their credit report.

 

If your goal is to improve your credit rating, bankruptcy should be considered.  I speak with dozens of people each month about their financial situation, and for many of them bankruptcy is not the best choice.  Everyone’s financial situation is different, and it is important to consult a competent bankruptcy attorney before deciding to file bankruptcy.

Beware the Creditor Offering to Settle Your Debt!

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I talk to people everyday that tell me that a creditor has offered to settle their debt for less than what they owe. unfortunately these creditors rarely tell the whole truth about how much settling their debt will actually cost.  When a creditor cancels a portion of a debt, they report the amount of the cancelled debt to the IRS as income.  At the end of the year the person who thought that they had paid off the debt find that the cancelled debt has increased their income tax obligation.

In addition, settling a debt usually requires the person to pay the settlement amount in a lump sum.  But while the debtor is saving to pay the lump sum, their other debts are still accruing interest and fees.  By the time the debtor has saved the money to settle the first debt, their other debts have increased due to the interest and fees.  Debt settlement may be a good option in some situations, but for most people it causes them to go further in debt.

Before deciding whether debt settlement is in your best interest, you should talk to a professional experienced in helping consumers resolve their financial difficulties.  Debtors should carefully consider their options, including settlement of debt, filing bankruptcy, and reorganizing debts through refinancing existing debts or pursuing a short sale on their real estate.