USA   |   UK   |   Australia   |   Canada
ADVERTISEMENT

Don't even think of spending frivolously before bankruptcy

Charging up a storm before you file is considered fraud

By

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive

Question for the CreditCards.com expert

Dear To Her Credit,
I'm so far in debt that I don't know how I'll ever get out of it. I hardly spend anything, but my expenses are way more than my income. My sister was in a similar situation a couple of years ago, and right before she filed for bankruptcy, she went on a spending spree and got all kinds of clothes for herself and gifts for everybody. She even took cash advances and gave money away. Then she just filed for bankruptcy and got a fresh start. She says it was easy!

I'm thinking about doing the same thing. If I'm going bankrupt anyway, why not max out all my cards first?  -- Lisa

Question for the CreditCards.com expert

Dear Lisa,
Even if you could get away with buying things that you never intended to pay for, you'd have to wonder about the ethics of the idea. Something for nothing always comes out of someone's pocket.

You don't need to wrestle with your conscience, however, because bankruptcy courts are wise to such plans. They decide which debts to discharge, and you'll still have to pay for last-minute spending sprees.

If the court determines you made purchases shortly before you filed for bankruptcy -- which they can easily see by looking at your credit card statements -- they may decide you took out loans with no intention of paying them back. That's called fraud. At the very least, those debts will not be discharged, or your entire bankruptcy case may be thrown out of court.

If you transfer money and gifts to your family and friends, you can find yourself in worse trouble. It's easy to run afoul of the fraudulent transfer laws -- rules designed to keep people from making gifts to take value out of the hands of creditors.

The most flagrant abuse of the fraudulent transfer laws is when people give away cash that they expect to get back after the bankruptcy is complete. It's clearly a fraudulent transfer if both the giver and the recipient know that the goods are only being held until after the bankruptcy.

When people cannot keep up on their bills, any significant gifts they make are considered fraudulent transfers even if the givers don't expect to get anything back. For example, let's say a woman writes a $10,000 cash advance check on her credit card account to her brother shortly before she files for bankruptcy. The court will go after that $10,000, and if by then her brother has spent it, now he's in trouble, too.

In extreme cases, people have been known to go to jail for making fraudulent transfers. That's more likely to happen in elaborate schemes involving millions of dollars. However, state laws vary and it's impossible to predict the consequences people may face if they try to defraud their creditors. Preserving your good name and financial stability for years to come should be enough incentive for you to avoid even the appearance of misconduct.

There is one thing worse than being in debt, and that is being on the wrong side of the law. Your sister apparently got away with it, but probably not as easily as she makes it sound. You may not be so lucky.

If you cannot make your credit card payments, stop using the cards immediately. Do everything you can to get caught up, even if you have to go on a Spartan budget. Sell something or take a second job. Don't dig the hole deeper by spending money or giving away cash or presents. It won't make you feel better, and it can make things a whole lot worse.

Meet CreditCards.com's reader Q&A experts
Vexed by a personal finance problem? CreditCards.com's Q&A experts answer questions from readers every weekday. Ask a question, or click on any expert to see their previous answers.
Gary Foreman, New Frugal You columnist Gary Foreman,
"New Frugal You"
Sally Herigstad, To Her Credit columnist Sally Herigstad,
"To Her Credit"
Cathleen McCarthy, Cashing In columnist Cathleen McCarthy,
"Cashing In"
Jane McNamara, Let's Talk Credit columnist Jane McNamara,
"Let's Talk Credit"
Elaine Pofeldt, Your Business Credit columnist Elaine Pofeldt,
"Your Business Credit"
Erica Sandberg, Opening Credits columnist Erica Sandberg,
"Opening Credits"

Published: June 13, 2008



Join the discussion

We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

Three most recent To Her Credit stories:

Share This Story




Follow Us!


Credit Card Rate Report

Updated: 11-27-2014

National Average 14.98%
Low Interest 10.37%
Balance Transfer 12.73%
Business 12.85%
Student 13.14%
Reward 14.93%
Cash Back 14.94%
Airline 15.46%
Bad Credit 22.73%
Instant Approval 23.33%

ADVERTISEMENT
ADVERTISEMENT