Does the following scenario sound familiar to you? The Smith family has had a difficult year financially. John Smith lost his lucrative career as a result of cutbacks to middle management at a previously thriving construction company and has been working two jobs in retail for several months. Jane Smith recently re-entered the workforce after twelve years of staying home to raise children in order to help make ends meet. As the year comes to a close, Mr. and Mrs. Smith realize that bankruptcy is inevitable and decide to have one more wonderful Christmas before confronting the legal steps that will need to be taken. The credit cards come out of the wallets to make this holiday the best one yet. Tickets are purchased for the entire family to attend the Houston Texans’ final game of the season. The girls get new iPods and cell phones. The Smith’s only son, true to his Texas roots, receives new gear to help him prepare for upcoming tryouts for his high school’s football team and a used truck to drive to the games.
The Smiths have no reason to worry because all of the mounting credit card bills will just be included in the bankruptcy settlement, right? In reality, this family may learn a hard lesson about the consequences of their spending practices.
If you are feeling overwhelmed by the debt that you are carrying and you believe that bankruptcy is your best solution, please know that some of the credit card debt you have accumulated may not be dischargeable. Section 523(a)(2) of the federal Bankruptcy Code addresses the problem of credit card binging. This clause exempts from discharge “debt that was obtained if an individual made material and false representations about his financial condition.” This may mean that a person submitted fraudulent information on the credit card application or knowingly made purchases for which he knew he would not be able to pay. The latter issue is the more common situation, and the exemption that describes the scenario involving the Smith family.
A credit card company is going to use Section 523(a)(2) to challenge the discharge of your debt if one or more of the following circumstances exist:
1. An increase in credit card usage shortly before filing for bankruptcy
2. The use of the card for recent vacations or travel
3. Using the card while unemployed or otherwise without reasonable ability to repay
4. A large balance at the time of filing
One specific point in the Bankruptcy Code, Section 523(a)(2)(C), deserves special attention from all of those shoppers who are determined to find the perfect gift regardless of cost. Consumer debts owed to a single creditor that total more than $500 for luxury goods or services within ninety days of filing for bankruptcy will be considered non-dischargeable. And, by luxury items the law is not referring to fur coats and yachts. Instead, luxury goods are defined as “goods or services reasonably not necessary for the support or maintenance of the debtor or a dependent of the debtor.”
What does this mean for people who overindulge with their spending during the Christmas season? If you spend thousands of dollars in December knowing all along that you plan to file for bankruptcy once the New Year rolls around, your plans for debt relief may be delayed. If you know that you will not be able to pay for the bills you created during Christmas, you will have to wait at least four to six months into 2010 to file for bankruptcy. In the meantime, you will be expected to make regular payments to your creditors. The bottom line is that you should not view an intended declaration of bankruptcy as an excuse to make everyone happy with the expensive gifts under the Christmas tree.
When it comes to issues of bankruptcy, Texans are in a better position than many others in our country. In 2008, our state ranked forty-sixth in the country for number of bankruptcies filed. While residents of the Lone Star State are proud of being the biggest and best in so many areas, this is one ranking for which we should take pride in being nowhere near the top. However, this relatively good standing does not mean that there are not thousands of Texans who are struggling to pay their bills every month. With the pressure to be a good consumer from the moment that the doors open on Black Friday until the exchanges are made and the clearance items are tagged the day after Christmas, the end of the year only makes already difficult situations even worse.
If you believe that you may be a candidate to file for Chapter 7 bankruptcy, which essentially offers a fresh financial start to those who qualify, make sure that you do not at this point begin to create debt that cannot be discharged. The time to consult with an experienced bankruptcy attorney is now. You need to receive solid legal advice concerning your financial options and any spending pitfalls to avoid while the paperwork is being drafted. Once you know where you stand, try to relax and enjoy the rest of the holiday season at home with family and friends and not at the local mall. Your credit rating and your legal counsel will thank you for it.
Tony R. Bertolino is the managing partner at Bertolino LLP with law offices located in Austin, Houston and San Antonio, Texas. A member of the Trial and Appellate Litigation Team, Mr. Bertolino’s practice is devoted largely to complex transactions, commercial litigation, business law, entertainment law and family law matters. You can read more about Mr. Bertolino at www.belolaw.com