October 22, 2019

Should You Pay Back Your Parents or Siblings Before Filing Bankruptcy

Should you pay back your parents, siblings, friends or other relatives before filing bankruptcy?  I get this question frequently as many of the potential clients I see have borrowed money from private sources in an effort to avoid bankruptcy.

My Bankruptcy Law Network collegue Susanne Robicsek answers this question clearly and consisely in a 2007 post on the BLN blog.  Susanne’s advice remains valid – do NOT pay back a personal loan prior to filing bankruptcy without first talking to a bankruptcy lawyer.

There are two potential issues if you pay back mom or dad, or the next door neighbor.  First, there is the problem of “preferences.”   Congress recognized that debtors would be tempted to favor certain creditors in a pre-bankruptcy setting.   The bankruptcy code contains a section that addresses so called “preferential” payments on old debts. [Read more…]

Recent Use of Credit Cards – How Long Should He Wait to File?

I wanted to get an opinion on whether I can file or not. I spoke with another attorney who stated that I needed to wait for awhile because I have recently used my credit cards.   I was hoping to get a second opinion from you as the sooner I can file, the better.
–Aaron

Jonathan Ginsberg responds: Aaron, there are two potential problem areas you may face:

The first arises from Bankruptcy Code Section 523(a), which provides that there is a presumption of non-dischargeability for the following debts:

  1. consumer debts owed to a single creditor totaling more than $500 for “luxury goods or services” incurred w/in 90 days of filing;
  2. cash advances totaling $750 within 70 days of filing

My experience has been that under the new law, most credit card lenders will be very quick to file an objection to discharge of debt if your recent debt falls into this category

Secondly, Section 523 also says that debts incurred under “false pretenses” or with a “false representation” may be non-dischargeable.  This means that no matter when the (credit card) debt was incurred, the credit card company can challenge discharge if they can prove that you knew or should have known that you would not be able to pay the debt when you incurred it.

Ever since the October 17, 2005 effective date of the new law, I have seen a steady increase in the number of challenges by credit card companies.  Most of these cases settle because debtors in bankruptcy do not have the funds to pay a lawyer to fight the discharge action.

So, I fall back on the same advice I have been giving my clients for almost 20 years:

  1. as a general rule, if the total debt owed to a particular creditor is $15,000 or less, and you are outside the 90 day window of Section 523, your case probably will not hit the radar of the credit card lender
  2. if you can put 6 months between your last use of the card and filing for bankruptcy, your odds improve dramatically
  3. during the time your case is “ageing,” you should consider making a regular payment (even if it is $15 or $20 per month).  Even this small payment shows good faith and may delay the filing of a collection lawsuit.  And if you should come into money and want to pay off the debt your account will not be in “non-payment” status.

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