This morning, I received an email from a potential client who made a very bad decision that will likely keep him from filing Chapter 7 for six months to a year. Other than this one mistake, he is a clear Chapter 7 candidate:
- his household income is below the median – so we do not have to deal with the means test
- his house is modest – valued at around $120,000 with mortgage debt equal to or above the value. He is also prepared to surrender his house
- he has $70,000 in credit card bills – all fairly old
- he has $1,000 of medical debt
What, then, is the problem?
In February and March, my potential client transferred the balance on several of his credit cards to new cards with lower interest rates. Now, instead of having a lot of old debt, he has brand new debt in the form of what amounts to a cash advance.
Section 523 of the Bankruptcy Code says that cash advances totaling more than $750 within the 70 days prior to filing are presumed non-dischargeable. (Jonathan notes that several astute readers emailed me to correct my error regarding the presumption of non-dischargeability for cash advances. Cash advances in the weeks prior to filing bankruptcy are still not a good idea ) The transferee card issuer could object on the grounds that when the balances were transferred, my potential client knew or should have known that he was insolvent and that he would not be able to pay back these new debts.
My advice – start making minimum payments. Do so for at least 6 months, or a year, if possible. Even then, there is some risk, but after a year of making payments he would have a "good faith paper trail."
The lesson here – if you find yourself in significant debt, think very carefully about making any significant financial moves. Seek professional counsel. Several times a month, I meet with people for a bankruptcy consultation and we end up deciding that bankruptcy is not the right move right now. More importantly, I advise these folks what not to do and how to avoid making a bad situation worse. Quite frankly, these type of clients get real value out of their consultations and I encourage anyone who thinks that there is a 1% chance of bankruptcy to spend an hour with a bankruptcy lawyer.
[tags] chapter 7 bankruptcy, balance transfers, cash advances, Section 523, objections to dischargeability of debt [/tags]