Michigan Attorney Blog

Holiday Spending and Bankruptcy: Some Call it Fraud

You May Be Visited by 3 Ghosts: Non-Dischargeability, Denial of Discharge, and Criminal Penalties …

holiday spending and bankruptcy

Image by Kelvin Kay, courtesy of Wikimedia Commons

Pre-Bankruptcy Spending: Don’t Risk Your Discharge

The instinct to just take any hit necessary to get the gift-buying many of us feel obligated to at this time of the year is a powerful one. “I’ll just get Aunt Sally taken care, then I’ll worry about the credit card later on in the year …”

The ripple-effect of credit over-extension has not only practical implications (do you know you still have a job later in the year to pay that bill with?), but it also has implications with regard to a potential, post-holiday season bankruptcy.

In particular, if you already know or think that you may file a bankruptcy in the coming months, your pre-bankruptcy holiday spending is an act fraught with peril.

The basic word you want to avoid having slung around in your bankruptcy case is “fraud.” Many potential bankruptcy filers are shocked when that word arises during their initial consultation when the bankruptcy attorney they are meeting with (hopefully) discusses recent credit card uses or other extensions of debt with them. “Me? Fraud? Never!”

Few mean to engage in fraud, but, for some, the temptation to use a credit card prior to filing a bankruptcy is great. It is also fraudulent if done with the intent to not repay the debt.

Incurring debt within 90 days of the filing of a bankruptcy petition is presumptively fraudulent, and Michigan’s own statutes regarding fraud allow for an examination of transactions engaged in as much as 6 years prior to the filing of a bankruptcy, depending on the sort of transaction engaged.

The First “Ghost”: Non-Dischargeability of the Pre-Petition Debt (and Increased Attorney’s Fees)

The most common reaction of a creditor to the filing of a bankruptcy when you have used a credit card or other line of credit in the 90 days (or more) prior to the filing of a bankruptcy is, first, to threaten and then to possibly actually file an “adversary proceeding” (lawsuit) against you in your bankruptcy case seeking to have the debt in question declared to be non-dischargeable. In other words, seeking to have the debt survive the bankruptcy.

Additionally, depending on what you bought with the credit card, etc., the creditor may also demand the return of the items purchased. (Whether there is a bona fide legal basis for this demand or not is something to be addressed by your attorney when this sort of thing happens.)

In either case, the microwave you bought your Aunt Sally for Christmas will cost you in a subsequent bankruptcy, both by being required to pay the debt in full as if you had not filed bankruptcy at all in settlement or via a formal judgment if the creditor does file its adversary proceeding lawsuit against you—and by way of the additional attorney fees your attorney will have to charge you for settling or defending the matter, which will certainly be more than that microwave cost you in the first place.

The Second “Ghost”: Denial of Discharge

Section 727 of the Bankruptcy Code (the Federal law governing the bankruptcy process) also allows a creditor to request that your discharge be denied on a number of different bases. In particular, the creditor may seek to have the discharge of all of your debts denied for delaying, hindering, or defrauding creditors (particularly if your holiday spending involved use of credit to purchase gifts for friends and family and then failing to disclose those gifts in your Bankruptcy Petition), for making false statements, and for destroying or concealing financial records.

Creditors have 60 days from the date of your 341 Meeting of Creditors hearing to file an adversary proceeding seeking denial of your discharge—but they can also later seek to have your discharge revoked if new information appearing to indicate fraud bubbles up.

Further, a creditor can file an adversary action against you seeking both non-dischargeability of a specific debt and a denial of your discharge on the whole. They are not mutually exclusive points of complaint.

The Third “Ghost”: Criminal Penalties

Finally, 18 U.S.C. Sec. 157 allows for a potential 5-year jail-sentence for making a false or fraudulent representation or claim or promise in a bankruptcy petition.

Is that microwave for Aunt Sally really worth it?

Holiday Spending and Bankruptcy: The Bottom-Line

The bottom line regarding holiday spending and bankruptcy is to play it safe if you know or think that you may file a bankruptcy anytime in the next year following the holidays. A bankruptcy discharge is the most powerful tool that consumers have under American law to deal with impossible debt difficulties, and friends and family-members will understand if your holiday gift-buying is a little more conservative this year than maybe it has been before.

Make this holiday a “cash-only” holiday, and avoid digging the debt hole deeper and in a way that may be even more difficult to escape later through the use of credit.

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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