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Chapter 7 Bankruptcy Trustee May Challenge Increased Unsecured Debt Within Six Months Prior To Filing

By Jonathan Alper

Bankruptcy trustees seem to be getting tougher on debtors who incur significant credit card debts and large secured debt obligations prior to filing Chapter 7 bankruptcy. I am seeing challenges asserted against significant credit card charges within six months prior to filing bankruptcy. That does not mean that you cannot use a credit card for six months before you file. It means that large charges or a substantial increase in credit within the prior six months could draw scrutiny.

In my experience, more than half of my clients have increased unsecured borrowing in the months leading up to their bankruptcy. Some for good reason; some for not good reasons. Some people, after they see bankruptcy as a good option, will intentionally run up credit cards to buy things they want but do not need. These people are trying to take advantage of their creditors and the bankruptcy system; trustees should come down hard of this type of debtor abuse.

Other people file bankruptcy reluctantly after a financial setback such as a job loss, pay decrease, or unexpected large debt. These people will use credit cards to buy necessities because they hope that their fortunes will improve and they can avoid bankruptcy. In my opinion, such individuals should not be penalized for increasing debts.

However, as a practical matter, if creditors and trustee do not distinguish properly the good and bad reasons for credit card debt prior to bankruptcy these people with good motives are taking a big risk when they borrow in order to buy time to work out of their financial situation. If they are unable to increase income, or decrease expenses, these well-intentioned debtors may have recent debts challenged in Chapter 7 bankruptcy.

People in financial difficulty may have a difficult choice. Few people want to file bankruptcy. But bankruptcy may be the more conservative option at the onset of financial problems. For if you need to incur debts to sustain you while you look for non-bankruptcy solutions you may find that bankruptcy is a more difficult and risky option if your self-help efforts don?t work out because the debt you incurred during your hardship may be challenged. .

Full post as published by Florida Bankruptcy Law on March 28, 2011 (boomark / email).