Back in April, I wrote a post about the issue of balance transfers and Chapter 7 bankruptcy. In this post I note that balance transfers were dangerous because from the perspective of the new credit card issuer, the transfer was new debt. In other words, if you have been carrying a $10,000 balance on your Discover account, for 5 years, and two weeks ago you transferred this balance to a new Citibank account to get a better interest rate, that $10,000 debt is new debt as far as Citibank is concerned.
Because credit card lenders are particularly sensitive to unusual patterns of debt and access to credit shortly before bankruptcy, there is a good chance that this $10,000 new debt in my example would generate an objection and discharge challenge.
One of the Chapter 7 trustees on the panel in the Northern District of Georgia emailed me to note an additional issue. Remaining with our example, the act of tranferring the $10,000 debt to Citibank would serve as a payoff to Discover. Under the preference rules, the payment of an antecedent (old) debt to Discover within 3 months of filing would be considered a preferential transfer. The Chapter 7 trustee would then have the right to demand that the recently paid off creditor – Discover – remit the $10,000 to the trustee for distribution as part of the bankruptcy estate.
In this scenario would the debtor end up facing both a discharge complaint from Citibank because of the new debt and as well as a discharge complaint from Discover since the the $10,000 had to be forfeited to the trustee?
The Chapter 7 trustee who wrote me says that she is not aware of any examples where the paid off creditor (Discover in our example) came after the debtor to recoup its loss. But such a scenario is certainly possible.
If you are a debtor or debtor’s lawyer and have been faced with this situation, please let me know what happened in your case.