My Bankruptcy Law Network colleague, Wendell Sherk, recently posted a very helpful case study about a case called In re Brumbaugh in Ohio involving credit card use prior to bankruptcy. Although Wendell’s case study looks to 6th Circuit law (whereas cases filed in Georgia would look to 11th Circuit precedent), I think that the reasoning used by the judge in the Brumbaugh case can give you some insight as to how bankruptcy judges deal with real life situations.
In the Brumbaugh case, a debtor transferred an $18,000 balance from a high interest credit card to a new Chase credit card. The debtor also used the Chase card for several small retail purchases including a few purchases made after she spoke to a bankruptcy lawyer.
After the debtor filed for bankruptcy, Chase filed a lawsuit in bankruptcy court (called a Complaint to Determine Dischargeability of a Debt) to argue that the entire $18,000 balance should be deemed “non-dischargeable” by the bankruptcy judge. In other words, Chase wanted its claim to survive the bankruptcy and not be discharged.
Despite a fact pattern that looked pretty bleak for Mrs. Brumbaugh, the bankruptcy judge ruled against Chase. While recognizing that this was a close call, the judge ruled in favor of the debtor because of the following:
- most of the $18,000 balance was in the nature of a balance transfer, not new charges – under the bankruptcy law, balance transfers are not treated like new purchases
- the debtor made the transfer in response to a Chase offer that gave her 0% interest
- the transfer was made by the debtor who was going through a divorce and the debtor saw the lowered interest rate as necessary to get her financial house in order
- the debtor and her spouse were trying to sell their house and planned to use the proceeds to pay down this debt. The house did not sell, but the judge believed that the debtor had a reasonable plan
- the debtor made payments to chase after the transfer – debtors who plan to defraud a creditor rarely make payments.
Obviously, not every judge would rule the same way as the judge did in the Brumbaugh case. And Mrs. Brumbaugh had to pay a lawyer to defend her in this litigation. My feeling is that if Mrs. Brumbaugh had been even slightly less credible and sympathetic, she would have lost.
Wendell closes his post by repeating a warning that I have been giving for years – if bankruptcy is an option, even a remote option, be very careful about making any significant financial moves until you have spoken to a lawyer. For information about bankruptcy in St. Louis, take a look at Wendell’s web site.