Challenges to the Discharge of Luxury Purchases and Cash Advances

One of the advantages of a Chapter 7 bankruptcy is that it allows you to permanently discharge certain debts, meaning that you will no longer have personal liability for them. As a general rule, credit card debt can be discharged, but there are limits.

Under the bankruptcy laws, any debts arising from the purchase of luxury goods  within 90 days of your petition for bankruptcy  made from a single creditor will be presumed to be fraudulent and non-dischargeable, if the purchases total more than  $650. This result is not automatic. The creditor has to file a Complaint in the bankruptcy seeking non-dischargeability. If it does so, the burden is on the debtor to prove that the purchases or resulting debt were not made with intent to defraud the creditor. Stated another way, a creditor will not be required to prove that you did not intend to pay or that you intended to discharge the debt in bankruptcy. Instead, you will have to  introduce evidence to demonstrate that the purchase was not a luxury, but necessary for the support or maintenance of the debtor or a dependent or spouse, or that the purchase was not made for a fraudulent or improper purpose.

For purposes of the bankruptcy law, a luxury item is considered to be any goods or services not reasonably required by the debtor for his or her own support or for the support of any legal dependent. While the determination of whether an item is a luxury item depends on circumstances, items like food, gas, clothing and furniture are more likely to be considered non-luxury than jewelry, home appliances, books, or a computer.

The same presumption applicable to luxury purchases also applies to cash advances on a credit card or other open end credit plan made within 70 days of filing, to the extent that these total more than $925. This does not apply where the cash advance is for a business purpose.

We generally recommend that our clients stay away from these kinds of purchases or use of credit. Like any unusual or suspect financial dealings, these will commonly result in suspicion and greater scrutiny across the board. When anticipating a bankruptcy, it is generally best to play it straight and stay within the bounds applicable to the “honest but unfortunate debtor”.

That said, a certain amount of legitimate planning going into a bankruptcy is permitted. The wisest course of action is to consult with and follow the advice of an experienced and ethical bankruptcy lawyer.

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Debt Collectors Prone to Violation of Bankruptcy Discharge

A bankruptcy discharge releases the debtor from personal liability for most but not all debts. In essence, the debtor is no longer legally required to pay any debts that are discharged. This discharge is permanent. The bankruptcy discharge is a court order that prohibits the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters and personal contacts.

Upon execution of the discharge order, creditors receive a copy of the order of discharge, and are put on notice that they violate the injunction provisions at their own risk. Such violations of the order of discharge are considered contempt of court. The bankruptcy court has the inherent power to punish for such contemptuous conduct [Code sec. 105 (a) and Rule 9020 (b)]. There are many cases that are used as examples that such violations are not to be taken lightly and will not be tolerated

The discharge is the most important right that bankruptcy affords. It has its limitations, as we have discussed in recent blog articles and discuss below. However, we see with some regularity that some creditors whose debts have been discharged still try to collect anyway. One way they do this is to include fine print stipulations written on the backsides of the notices that are sent, or outright collection efforts.

Some debts are “automatically ” exempt from discharge. These debts include most income taxes, all payroll and sales taxes, alimony, child support and other “domestic support obligations”, and most student loans. If you sign an agreement to reaffirm a car loan or other debt during the bankruptcy and the agreement is approved by the court before your discharge, you have given up the protection of a discharge in the only way allowed for such debts. A discharge also does not protect you from most debts that arise after a bankruptcy filing, including condominium, co-op or association fees. Creditors with collateral, such as mortgage holders have the right to pursue foreclosure, repossession or sale of their collateral if the loan is not current. This right does not extend to trying to collect on the personal obligation. See our recent blog articles on this topic.

If you are facing this type of activity, we recommend you document all the contacts and keep all the notices. Recording telephone calls is a good idea, but only if you advise the caller during the recording that you are recording the call. If you think your rights are being violated, the first step is to send a clear notice in writing to stop, and keep a copy. If the collection efforts persist, it is time to call in experienced legal help.

Neuner & Ventura are experienced attorneys who are federally recognized as a debt relief agency. Our attorneys can help protect you against creditor abuse both before and after a bankruptcy. Please contact Nuener & Ventura at (856) 596-2828 for a consultation.

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