December 17, 2018

Credit Card Balance Transfer Puts Chapter 7 Options in Jeopardy

This morning, I received an email from a potential client who made a very bad decision that will likely keep him from filing Chapter 7 for six months to a year.  Other than this one mistake, he is a clear Chapter 7 candidate:

  • his household income is below the median – so we do not have to deal with the means test
  • his house is modest – valued at around $120,000 with mortgage debt equal to or above the value.  He is also prepared to surrender his house
  • he has $70,000 in credit card bills – all fairly old
  • he has $1,000 of medical debt

What, then, is the problem?

In February and March, my potential client  transferred the balance on several of his credit cards to new cards with lower interest rates.  Now, instead of having a lot of old debt, he has brand new debt in the form of what amounts to a cash advance.

Section 523 of the Bankruptcy Code says that cash advances totaling more than $750 within the 70 days prior to filing are presumed non-dischargeable.  (Jonathan notes that several astute readers emailed me to correct my error regarding the presumption of non-dischargeability for cash advances.   Cash advances in the weeks prior to filing bankruptcy are still not a good idea )  The transferee card issuer could object on the grounds that when the balances were transferred, my potential client knew or should have known that he was insolvent and that he would not be able to pay back these new debts.

My advice – start making minimum payments.  Do so for at least 6 months, or a year, if possible.  Even then, there is some risk, but after a year of making payments he would have a "good faith paper trail."

The lesson here – if you find yourself in significant debt, think very carefully about making any significant financial moves.  Seek professional counsel.  Several times a month, I meet with people for a bankruptcy consultation and we end up deciding that bankruptcy is not the right move right now.  More importantly, I advise these folks what not to do and how to avoid making a bad situation worse.  Quite frankly, these type of clients get real value out of their consultations and I encourage anyone who thinks that there is a 1% chance of bankruptcy to spend an hour with a bankruptcy lawyer.

[tags] chapter 7 bankruptcy, balance transfers, cash advances, Section 523, objections to dischargeability of debt [/tags]

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

Comments

  1. This is not good news. Last October my wife filed for divorce. We still live in the same house and share many, but not all, expenses. We also have a daughter in high school. Most of the credit card debt is in my name although a large share of the debt is family purchases. At first she paid some but quickly decided not to pay anything. She didn’t even contribute to groceries or clothes for her own daughter. I tried to keep up with minimum payments and did some borrowing from peter to pay paul. I would pay minimums and then use the cards for gas, food, clothes, etc. The few cards she did pay and then didn’t fell short of their minimum and within a short time all creditors had raised their rates to near 30%. In short I won’t be able to show a paper trail of good faith payments. I tried to pay but with half the normal family budget and increased expenses I couldn’t. What now?

  2. CATCHMEIFYOUCAN says:

    Guess I slipped under the radar!

    I was already $55,000 in cc unsecured debt and unsecured loans by end of February 2006 (all of which were caught up in payments). March 06′ I applied for another credit card and received $10,000. I transferred the whole balance to pay off another credit card. April 06′ I went on a gambling spree (mid APRIL) I actually blew $6000 in cash advances in 2 days from different casinos. I was falling a month behind on cc payments, my loans were covered w/automatic deductions from my checking accts.

    JULY 06′ I filed for Ch13 (due to having 2 full time jobs). The only objection I received was from the Trustee, he didn’t like my proposed $250 a month repayment plan. (Even though my Median Test proved I was -$60, schedules I and J showed +$800). I went before the judge and he gave me a choice: pay $800 a month the next 5 years OR quit one job for awhile convert to Ch7 and pay nothing! YOU DO THE MATH !
    I made 3 payments all in all in Ch13. The 3rd payment I didn’t really need to make but was just covering my butt until the conversion was said and done.
    OCT 06′ converted to Ch7
    No Objections, No assets. Not even a mention on the heavy cash advances??? They didn’t ask, I wasn’t going to quetion it, yah know.
    JAN 07′ DISCHARGED
    MAR 07′ Trustee files no distribution report etc. Now just awaiting closing.

    I guess I’m feeling “too good to be true!” I was real worried about those cash advances, but since there were no objections, I guess I can stop worrying about creditors coming after me, and I guess their too late to come back and do anything about it ???

    CATCHMEIFYOUCAN

  3. Martha Miller says:

    Jonathan,

    This has been a matter of some confusion to me because I’ve been told this advice is common. As a 7 trustee, collecting balance transfers made within 90 days has been a painless way to bring assets into the estate, especially in these times of increasing asset-free cases. I have never seen the credit card company pursue the debtor.

    Typically, if they have a new value defense the company sends me the account records showing me the subsequent charges, we do the math and they send me a check.

    We have UST mandated trustee training coming up later this month and this was something I planned to raise. Whatever war stories you have, I’d appreciate. We want to know the consumer bar’s concerns and your bar to know the panel’s. We all are trying to do our jobs and make a living.

    thanks,

    Martha

  4. Are credit Card balances tranfers allowed with Chapter 13 as well as Chapter 7?

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