December 15, 2019

Can You be Thrown in Jail for Not Paying Your Credit Card Debt?

“Can I be thrown in jail for not paying my credit card debt?” What about other unsecured debt like a broken apartment lease, a car repossession deficiency, medical bills or personal loans?

jailed for contempt of court

The short answer to this question is “no,” there is no debtor’s prison in the United States and an unsecured creditor like a credit card company cannot contact your local police department and have you picked up and thrown in jail.

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Christmas Shopping and January Bankruptcy

credit card transactionAs we approach the Christmas holiday season, I want to remind my readers of two things.  First and foremost, I want to wish all of my clients and blog readers a happy and healthy holiday season.   Financial struggles will come and go but if you have your family and your health, not a whole lot of other things matter.

Secondly, I would respectfully suggest that it is never too late to begin the process of tackling your financial issues.   Over the years I have met with many potential clients in January and February who bring me credit card bills containing charges incurred for presents in November and December.  They are ready to make a fresh start and want to file.

On more than one occasion I heard the explanation “well, I knew that I was going to have to file bankruptcy at some point – but I wanted my family to enjoy a nice Christmas first.”

From my perspective as a bankruptcy lawyer, this attitude will get you in trouble.  Common sense should tell you that you cannot run up your credit cards buying gifts, then wipe out that debt a month or two later by filing bankruptcy.

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Can a Small Business Owner File Chapter 7 Personally and Still Keep His Business

Over the past few weeks, I have received a number of calls from small business operators who want to file Chapter 7 on credit card debt, but continue to operate their businesses.  In many of these cases, the business owner used personal credit cards to fund business operations and now the business is profitable or marginally profitable but for the debt service on tens of thousands of dollars of credit card debt.

Unfortunately the answer I have to give to these prospective clients is not what they want to hear. If you own a small business and are incorporated, the shares of that business are assets. In turn, any accounts receivable for that business are an asset of the business that accrues to the shareholders.

Except in the case of a personal service business that has no inventory or receivables or any value other than the daily efforts of the owner, my experience has been that if you file a Chapter 7, the trustee will demand that you cease operations and turn over the books, the keys and the inventory to the trustee’s office. [Read more…]

Should I File for Bankruptcy – Widow on Social Security with $7,500 in Credit Card Debt to Same Bank Where She has a Checking Account

I am 65 years, a widow of 5 years, totally disabled, & my SS check is $1342.00 every 4 to 5 weeks. My SS check is auto deposited in my same bank that I have a $7,500.00 credit card debt owed.  

If I were to file for bankruptcy, could my bank garnish my SS check?

Also, my rent is $800.00 per month, & utilities use up the rest of my check without paying my credit card or buying food. I have been living on the sale money of my house which is almost  depleted.  Will that too enter into a bankruptcy?

I could use the $150.00 that I pay each month to my bank in credit card bills to buy food.  Right now I have excellent credit but have to eat come next fall or sooner. I would appreciate your advice.  Thank you.
–E.

Jonathan Ginsberg responds:  E, thank you for your question.  I don’t know that you need to file a bankruptcy.  Under federal law, Social Security money is totally exempt from garnishment or seizure by a credit card lender.  In other words, if you stopped paying the credit card, the bank (which I understand is the same bank that issues the credit card) would not be allowed to set off the money in your account to satisfy the credit card debt.  They also cannot garnish your Social Security check directly.

It is possible that the bank would close your checking account, so I would suggest that you go ahead and open a checking account with another bank.

Your bank account would be protected as to any money that is traceable to Social Security.  If you still have money in that account from the sale of your house, that money is not sheltered.  As you might imagine, it can be difficult to identify which money comes from the house sale and which comes from Social Security.  For this reason, I would do the following:

  • go to another bank and open a checking account and designate that account for the direct deposit of your Social Security check
  • go to another bank and open a savings account where you would place whatever remains from your home sale

You want to clearly separate your Social Security money/account from any other money.

Next, I would write the credit card lender and advise them that you cannot afford to make the payments anymore, that you are judgment proof and that your only source of income is Social Security money.  I would further advise the credit card lender that if they attempt to garnish your Social Security account you will sue them for actual and punitive damages.

Bankruptcy also does not make sense to me because the cost of filing even a simple case will cost you $1,000 or more.  It doesn’t make sense to spend $1,000+ to get rid of $7,500, especially when you are judgment proof.

Now, if you don’t pay the credit card debt, you will have to deal with collection phone calls and some nasty letters.  But, at the end of the day, there is not much they can do other than to call you and you can avoid the calls with Caller ID. Once they realize that there will be no recovery the calls will stop.
 

Math Proves Credit Card Debt Almost Impossible to Repay

My colleague, Houston attorney Pamela Stewart, recently posted on her blog this interesting table that shows just how long it would take to pay off credit card debt if you make only minimum payments.  If you have been sending in only minimum payments and you have a hunch that you have paid your debt two, three, even four times over, you may just be right.

This table assumes a 2.5% minimum percentage payment, and an absolute minimum payment requirement of $10.00 per month at an interest rate of 17%.

 

 Amount Owed Time Required to Pay Off Debt Total Interest Expense
 $1,000 12 years $979
 $5,000 24 1/3 years $6,210
 $10,000 29 years $12,745

 

Credit Card Offers Being Mailed to You at Accelerating Rates

I read in this week’s issue of the Consumer Bankruptcy News (a trade publication for bankruptcy lawyers) that during the 3rd quarter of 2007, credit card companies mailed 1.29 billion (that’s billion with a "B") credit card offers to U.S. households.  This is an increase of 2 million offers a year as compared to the 3rd quarter of 2006.  Approximately 29% of these offers were mailed to households that were already utilizing more than 30% of available credit.

To put this another way, men and women who already have credit card debt and who are most likely carrying balances month to month are still getting pitched on new credit card offers.  This is not an accident.

Credit card companies use sophisticated economic models to calculate expected profit.  They make their money on late fees and high interest rates.  You pay obscene costs if you carry a balance every month and if you make your payments late.

If you are struggling financially, do not allow yourself to be fooled that more credit will help you.  This is especially true if you find yourself paying monthly budget items like electricity, food and gasoline with credit cards.  If you find yourself carrying a balance for more than a month or two, take the cards out of your wallet.

Do not fall prey to balance transfer offers if bankruptcy is even a remote possibility (since a transfer to a new creditor within a few months of filing will be considered "new" debt by the transferee card. 

There can be a time and  place for unsecured debt.  Recognize the manipulation inherent in credit card activities and don’t allow yourself to become a victim.

Bankruptcy Filings On Their Way Back Up

My colleague, New York Bankruptcy attorney Jay Fleischman reports on his New York Bankruptcy and Consumer Law blog that bankruptcy filings are beginning to rise.  Jay notes the following factor as reasons for the increase:

  • relaxed credit underwriting standards by lenders in every range of the risk spectrum
  • interest rates with no caps – such as 30% penalty interest rates on credit cards
  • a growing number of uninsured debtors who have to file bankruptcy to resolve unpaid medical expenses
  • increasing gasoline prices

My call rate has been increasing because of these factors and a few more, including

  • the doubling of minimum credit card minimum payments
  • the post-Christmas, post-tax refund effect – many people are still carrying credit card balances from Christmas and they have used up their income tax refunds
  • mortgage delinquencies caused by upward adjustments of adjustable rate or interest only mortgages
  • the end of the October 17 lull – prior to October 17, thousands of debors who otherwise might have waited a few months to file took advantage of the old law.  Now, enough time has passed that people who were not previously in trouble are in trouble

As expected, the new bankruptcy law has not and will not reduce the need for honest, hardworking debtors to file bankruptcy.  The same problems that existed for debtors prior to October 17, 2005 still exist in 2006.

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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