As published in The Star-Ledger, April 16, 2012
Q. A friend of mine has filed for bankruptcy. I was shocked to learn that his attorney told him to go out and charge whatever he wanted to on his various credit cards prior to the hearing on his bankruptcy application. In other words, run up as much debt as you want/can because you won’t have to pay for it. Is there no law against this? Shouldn’t his ability to charge be hampered as soon as the papers are filed? This is his third bankruptcy in 20 years. Why should he get the huge flat screen, clothes, furniture, trips and more, while I pay my bills and can’t afford to do/get what he does?
A. Shame on your friend, and on your friend’s attorney.
It sounds like your friend has filed a Chapter 7 bankruptcy, in which he’s seeking a discharge of his debts in exchange for exposing his assets to analysis and possible liquidation by a Chapter 7 trustee for the benefit of creditors, said Ilissa Churgin Hook, a bankruptcy attorney with Hook & Fatovich in Wayne.
"Normally, creditors receive notice of a bankruptcy filing from the Clerk of the Bankruptcy Court within a few days to a week after the filing," Hook said. "Most creditors will immediately shut down the credit cards/credits lines, thus hampering your friend’s ability to use his credit cards after the filing of the bankruptcy case."
As for the advice given by the attorney, Hook said she strongly disagrees.
She said the bankruptcy code provides, generally speaking, for a fresh start for honest debtors who lack the ability to pay their debts.
"While it is generally acceptable for a debtor to charge necessities such as food and gas on a credit card in the months leading up to a bankruptcy filing, the charging of luxury items and/or the taking of cash advances within a short period of time prior to a bankruptcy filing can be suspect, and even lead to a successful objection to the debtor’s discharge by a creditor or the Chapter 7 trustee," she said.
Creditors and the Chapter 7 trustee have the right to object to a debtor’s discharge if the debtor acted in a fraudulent manner in using or obtaining credit.
If your friend received items such as a flat screen television or a vacation as gifts from a third party, that should not hamper his ability to otherwise receive a discharge of his debts, she said. Charging those items is something different.
Hook said as of the 2005 amendments to the bankruptcy code, a debtor can only receive a Chapter 7 discharge every eight years. If your friend previously received a discharge pursuant to Chapter 13 of the bankruptcy code (in which he would have been required to repay certain debts pursuant to a court approved payment plan, he must, with a few limited exceptions, wait six years prior to receiving a Chapter 7 discharge.
"The 2005 amendments have made it more difficult for repeat or serial filers to wipe out their debts," she said.
- A "Biz Brain" column by Karin Price Mueller