If you are unable to retain a credit card with a zero balance before filing this does not mean you will be unable to obtain new cards. Because you can only discharge debt occurred prior to filing for bankruptcy, do not be surprised if you receive solicitations for pre-approved credit cards after filing for bankruptcy protection. Given your fresh start and inability to re-file for another bankruptcy for 6 years, do not be surprised if you receive solicitations from your old credit card companies. Although the new offers may come with slightly higher interest rates, if you use the cards wisely you can begin to rebuild your credit almost immediately by making timely payments and paying the balance in full.

- Richard V. Stokan, Jr.

When bringing such an action under § 523(a)(2)(A), a credit card company must prove the following elements of its case by a preponderance of the evidence:   (1) the defendant /debtor obtained money or property through a material misrepresentation he knew was false, or that he made with gross recklessness as to its truth; (2) the defendant/debtor  intended to deceive the credit card company; (3) the credit card company justifiably relied on the false representations; and (4) the credit card company’s reliance was the proximate cause of its loss.  See Grogan v. Garner, 498 U.S. 279 (1991); Longo v. McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir. 1993).

In a case premised on credit card transactions, “the representation made by the cardholder … is not that he has an ability to repay the debt; it is that he has an intention to repay.” Rembert v. AT&T Universal Card Services, Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 2003). Courts review the totality of the circumstances to determine, as a matter of fact, whether a debtor subjectively intended to repay the debt when he incurred it.

A Michigan bankruptcy court recently considered these issues in FIA Card Services v. Vernon May (In re May) and found that the plaintiff credit card company failed to meet its burden.  In other words, there was insufficient evidence that the debtor materially misrepresented his intention to repay, and the debt therefore could be discharged.  Some the facts considered by the court in reaching this conclusion included:  the debtor experienced an unexpectedly long period of disability; the debtor consistently made the minimum payments on the account and earned a favorable credit rating; and the debtor did not purchase luxury items or otherwise live lavishly. Instead, he purchased mainly for necessities.

The credit card company argued that fraudulent intent could be inferred because the debtor took out cash advances, using part of the cash to repay prior credit card balances.  The bankruptcy court rejected this argument:  “The evidence admitted at trial does not support any finding of “kiting” or a “Ponzi” scheme, contrary to [the credit card company's] unwarranted suggestion in its closing brief. Rather, it appears that a relatively unsophisticated borrower used assets (fungible loan proceeds) to pay expenses that he regarded as payment priorities….”

The In re May opinion offers some insight into how bankruptcy courts will analyze credit card discharge challenges.  However, every case is unique.  If you have already filed bankruptcy and been served with a credit card company’s adversary proceeding,  or are considering bankruptcy and fear that one or more of your debts may be challenged, talk to an experienced bankruptcy attorney in your jurisdiction.

-Drew Broaddus

Serena V.

Brief description of your legal issue:
I am in serious debt, besides my mortgage I owe roughly 20+ thousand in credit card debt.I owe the IRS
and have been trying to make payments as best as possible. I need help!

You need to file for bankruptcy.

Let me say it again for those of you who are still shaking your head.

YOU NEED to file for bankruptcy!

There, I gave you a little emphasis to really drive my point home.

Bankruptcy = Responsible Financial Behavior.

Crazy, no? It’s true. If you’re still reading, let me explain why. But first I need to give you a little background. This is going to be a long post, so go grab a cup of coffee and prepare to have your world shaken. I’ve been having this idea rolling around in my head for sometime and it finally came to full realization yesterday.

For ten years, I’ve been helping thousands of people file for bankruptcy. Usually, I would counsel clients into bankruptcy because something had gone wrong in their life. . . Medical Emergency, loss of a job, etc.

Then, I started seeing the baby boomers start to retire. They would go from full time work to living on social security and a small pension or small 401(k) savings. But they still had $50,000 in credit card debt, two mortgages, and a host of other expenses that couldn’t be removed. We filed them into bankruptcy as a means of retirement planning. For a while, my staff jokingly referred to me as a retirement financial planner instead of a bankrutpcy attorney. Sure, it was funny, but there was also more than a bit of truth to the statement.

Over the past year, I’ve watched my practice change. Now I’m filing cases for the upper middle class workers. Sometimes, they’ve lost their job, sometimes, the credit card companies have jacked their interest rates to 39.99% and they simply can’t handle the costs anymore. A lot of families fell into the same financial trap that has destroyed the economy in this country, they took out an option ARM when times were good. Now that the interest rate has reset significantly higher and banks have pulled their lines of credit, their is no way out. We use bankruptcy as a means to reorganize and downsize their assets and lives, respectively. We’re able to completely protect their retirement savings in their 401(k) accounts.

If we don’t do it, they wind up with nothing. Credit Card Judgments, Collections, Foreclosures, Family Stress, Divorce, you get the idea. It isn’t a pretty sight. In addition to being legal advocates, myself and my staff spend a lot of time talking people ‘off the ledge’ because money is the biggest cause of stress in our lives. It destroys marriages, it destroys relationships, it destroys our lives.

In other words, bankruptcy has now gone from being reactive to proactive.

So for the past couple of months, I’ve had this idea rolling around in my head about bankruptcy, but I didn’t quite know how to articulate it. Then I gave a lecture to a group of real estate agents and I read an article in the Wall Street Journal.

The lecture that I gave was how to use a Chapter 13 bankruptcy proceeding to save your client’s home from foreclosure. I try and give this lecture quite frequently to real estate agents in the State of Washington. Part of the lecture is to explain about short sales, the HAMP program, and how to stop the foreclosure process. Inevitably, this requires some explanation about Mortgage Backed Securities and Colalteral Debt Swaps, (MBS and CDS) the two things that brought our economy to the brink in late 2008 and gave rise to the bailout of the banks and companies like AIG.

Also, inevitably, someone asks the question, when and how will it turn around. I give a discussion about how banks have accepted all of this bailout money, but aren’t lending it out to the consumer or small business, the backbone of the economy. So, until the cash starts to flow again, don’t expect any recovery. I talk about how President Obama had proposed a plan to force lenders to the table, and the House passed that plan, but it died in the Senate. I talk about how bank lobbyists quickly intervened to kill any chance of forcing the banks to work with homeowners to relieve the debt burden they were under. Sure, there are programs like HAMP, but they haven’t helped nearly anyone yet, and it doesn’t look like they are going to anytime in the near future. I actually have a good time talking about Reaganomics and trickle down theory and how the money from TARP has not trickled down to us as consumers at all. So much for trickle down theory! Then I go into a discussion about how it was the banks that made the bad loans to the consumers, it was the banks who got the bailout money, and it is the banks who aren’t passing it on to us to help restart the economy. I close with the fact that the TARP money didn’t come out of thin air. It is borrowed money and it has to be paid back by the government. How does the government pay back it’s debt? Taxes. Who pays taxes? You and I do. So, those of us at the bottom of the trickle down ladder are getting a dry pail of dust and we’re the ones who have to pay for pouring the money into the system in the first place. This is more commonly known as “Privatizing the Profits, Socializing the Losses”. Let me explain further. When the bank execs got huge bonuses last year, that went into their private pocket. When the bank lost all of that money in 2008, you, the taxpayer, are the one who has to pay for it. That’s the socialization of the loss.

Now, I’ve been giving this same lecture for the better part of a year and a half. Every one hears this and experiences a certain level of frustration, but no more so than our normal level of frustration with government. However, in the past two months, that anger has become more significant. The other day, it reached a boiling point.

The people in the audience that day were visibly upset when I finished this portion of the lecture. There were probably 20 people or so in the audience and for a moment, I thought they were going to start throwing chairs around. I know there is a level of frustration out there and I think this group finally found the collective point to rally around. It had been illustrated and articulated for them for the first time and the need to vent was clear and obvious. I actually stopped the lecture and let these people have at it.

The audience was upset because these banks and credit card companies were not cutting any of them any slack. Most of the interest rates had increased in the past six months. One gentlemen had his line of credit cut on his home equity loan and it must have happened to a few others because there was a lot of agreement. As these people were real estate agents, they had to deal with the banks and mortgage companies on a daily basis and the common consensus was that the banks simply didn’t want to deal or modify contracts on short sale properties. In short, they had direct knowledge of how the banks had cut off their lines of credit and weren’t lending. As a result, their industry is suffering heavily and in this room, ‘their industry’ took the form of real people who were experiencing real hardship. Many of them came up to me afterward and have called me in the days since to arrange an appointment for their own personal bankruptcy.

I finally got back on track with the lecture and I explained how a Chapter 13 bankruptcy works. How it can buy a debtor time to sell a home instead of losing it to foreclosure. I explained how I could modify the mortgage amounts for investment properties and I could rewrite contracts for auto loans. I talked about dealing with the IRS and even discharging entire years worth of tax obligations. I explained that the filing of a bankruptcy petition is not the end of the world, but a new beginning. I discussed how businesses use Chapter 11 everyday to reorganize and that Chapter 13 was the consumer equivalent of a business reorganization.

Finally, at the close, one woman spoke up. Now, it’s interesting to note that at the beginning of the bankruptcy lecture, she told me that bankruptcy is only for deadbeats and losers. She was fundamentally opposed to bankruptcy and she was only here for the lecture because she was getting two hours worth of continuing education credit for it.

I expected to get a lot of protest out of her during the lecture, but she was pretty quiet throghout. At the end of the lecture, she raises her hand and says “So, you’re saying we can do the exact same thing that the banks are doing to us?” I looked at her and said “Well, yes, that is kind of what I am saying.” Her reply, “So, we’re no better than the banks!”

I thought about this for a heartbeat and pointed out to her that we, as consumers, and people, live our lives by a moral code. We are supposed to treat others as we want to be treated, we pay our debts, etc. A Corporation is not a person, but the law treats them as one. They can borrow money, pay taxes, pay debts, and be responsible corporate citizens. However, Corporations are usually made up of board members, who are actual individuals and they may have their own internal moral compass for what is right and wrong, but the corporation has a duty to make money for the benefit of the shareholders/investors. They do this as a corporation because they have a limited liability exposure using the corporate status as a shield from personal liability. Because of this shield from personal liability and the duty to make money, corporations don’t share the same moral values that was as inviduals persons do.

This womans moral compass made her believe that bankruptcy was bad, but if she were a corporation, she would no such moral compunction. We talked about this for a minute and I asked her to look at it from this perspective.

Imagine, you are a corporation and your family are your shareholders. They are the investors of your family status. Who then do you owe a duty to? To your family. Do you owe a duty to your third party creditor’s to pay the bill? Do you owe a duty to the credit card company who raises your interest rate by 19%. Or do you owe a duty to your investors (family) to keep the business (household) running?

As I asked her this questions, I could see her realization come to light. It was all in the matter of perspective and how you looked at it. I asked her to look at in the light above. She was looking at it from the obligation of a consumer rather than the head of a household.

Someone else asked if we should really engage in the same behavior that the banks do. They wouldn’t feel right about themselves for filing bankruptcy and discharging their debt. It would adversely affect the consumer and small business owner. They didn’t want to welch on the small business owner. After asking them exactly what small business they were obligated to, they couldn’t think of one.

I explained my theory of Joe the Butcher as a social explanation of why we believe in paying our bills. When I was growing up, and when my parents were growing up, we didn’t have Mastercard, Visa, and Discover. Credit was not nearly as prolific as it is now. I remember my Grandfather having a Diners Club Card and not everyone took it, only the nicest restaurants. Credit Cards were in the realm of the rich, not the common person. At least that was my perception as a young child.

When your parents needed to get some meat, but they couldn’t pay for it, they went to see Joe the Butcher. Joe would glady extend the credit for a week or a month. Your parents would pay the bill because they knew that if they didn’t, Joe the butcher would have trouble putting food on his table. Joe didn’t charge late fees, or an application fee, he didn’t charge interest, and if he did, it was a very small amount. If you didn’t pay, Joe would simply cut you off from getting any futher meat until you paid. Past due accounts were not a common problem for Joe. It was good business for everyone.

If butcher shops were still around today, you wouldn’t get a line of credit from Joe the Butcher. Joe would take your credit card as payment and get paid right away from the bank. Or, if you were buying a significatn amount, he would give you a finance application from Household Finance, or Citibank, to let you get a line of credit. After you were approved, you would be obligated to the bank and the bank would send Joe a check for the payment of the meat. Joe no longer had to extend credit or worry about his accounts because there was a finance company paying him immediately for his product.

At this point, the audience began to collectively change their orientation and perspective about bankruptcy. Suddenly, they saw the benefit of using it as a tool to reorganize their finances and emerge from the plan leaner and smarter. It is a fascinating thing to watch.

Now, let’s talk about the article I read in the Wall Street Journal (WSJ). The other day, the WSJ put out an article that said it was OK to file for bankruptcy. Heady stuff. I’ve never seen a Mainstream Media Outlet yet advocate for the filing of bankruptcy. Yet, there it was, in black and white. It is OK to file for bankruptcy. When your house is underwater, you can’t make ends mean, it’s OK to file for bankruptcy. In fact, it is fiscally, the smart thing to do.

Bankruptcy = Responsibility.

By filing for bankruptcy, you’re making a choice. A choice to put your family first, a choice to ensure the continued operation of your corporation (household). Without creditors calling you everyday, your life will have less stress. You will experience calm. Your corporate shareholders (family) will see this reduced level of stress and they too will be happier. With no more money going out to unsecured creditors, you will be able to begin reinvesting in your company (saving for college or retirement). Your company will grow and prosper as a result.

By eliminating the debt, your shareholders will thank you. Your company will have disposable income to go to dinner or to a movie. Peace and prosperity will reign with your smart financial management policy.

Now, explain to me how filing for bankruptcy is an irresponsible act. When you have to choose between paying $39.00 for a late fee and putting food on the table, tell me how filing for bankruptcy si an irresponsible act. When you have to stop investing in your childrens college fund or retirement account because the credit card company jacked your interest rate from 6.79% to 39.99%, tell me how filing for bankruptcy is an irresponsible act.

Bankruptcy = Responsibility

OK – so we have an angry mob that is my audience. We have the article from the WSJ telling that is is OK to file for bankruptcy. The mob has begun to realize that bankruptcy is not the awful thing they first thought. This is when my jumble of ideas crystalizes and I tell them that they need to file for bankruptcy. They need to be proactive in their financial future and use the bankruptcy code as the means to protect themselves now for what is coming down the path.

I know that the media tells us that a recovery is underway. No one shirks from calling this the greatest fiscal crisis since the Great Depression. But it’s OK to call it that because they want you to believe it is in the past. It isn’t in the past.

Think of a hurricane. In the midle of the hurricane, is the eye. In the eye, life is very calm and you think the storm has passed. But it hasn’t, it is still all around you. Right now, we’re in the eye.

When the economy crashed in 2008, the government began throwing all sorts of money at the problem. It was a good thing to do at the time, except, it hasn’t jumpstarted the economy in the way everyone hoped. It created a set of crutches to hold the economy up for a temporary time. Those crutches will be yanked out at the end of March when the stimulus money ends. Perhaps the government will create another stimulus package, but that is just creating money out of thin air by taking on more debt. We can’t afford the debtload we have now. America is fiscally insolvent.

You, and my audience the other day, intuitively know this is going to be a problem in a few months. The promised recovery we see on the nightly news has not made it to our mainstreet. People are still struggling to find work, people are still losing their homes, and the foreclosure bomb has a whole second act to bring on stage yet. It is simply not getting better at the consumer level. In middle class America, we are slowly being squeezed to death.

Banks are still engaging in reckless behavior. They didn’t use the TARP funds to take those bad assets off the books, they used that money to hedge bets in the other direction, that the derivatives market would fail. Thats the same risky behavior that led to the first crash. They used borrowed money to increase their reserves to make themselves look better to federal regulators. They used the borrowed money to pay lobbyists to make sure the idea of financial reform never gets out of committee in the House and Senate. And they pay their executive multi million dollar bonuses while our unemployment benefits get cut.

The backside of the hurricane eye wall is about to hit us again in the next few months. I suspect that the second half of the storm will be far worse than the first half. But that is only my opinion. Perhaps, someone out there has a great plan to get us out of this mess and pay off our national debt. But as a bankruptcy practitioner for over ten years, I see the American Government doing the exact same thing I see my client’s do right before they file for bankruptcy. Try to borrow their way out of the hole. It never works.

So, bankruptcy is a tool to be used now to streamline your estate, eliminate debt, downsize your life, and prepare for the second half of the storm.

Using bankruptcy is a way to eliminate unsecured debt, rewrite the contracts on your vehicles, and cram down the values and mortgages on your investment property. You can protect your retirement. Bankruptcy can be used to strip away unsecured second mortgages on homes. It is a powerful tool and it is perfectly legal under the law.

Now, do you think that the corporations would hesitate one second to use the law to their advantage over you? Let me give you an example. Credit card reform went into effect last week. The credit card companies knew that this day was coming for months. What did they do? Did they comply with the spirit of the reform and start doing the right thing last year when the law was passed? Nope. When the law was passed, but didn’t go into effect for several more months, the credit card companies changed all of your interest rates. They found any reason they could to jack them up before the law took effect. That way, you were already overly burdened when the law took effect and they couldn’t do it to you anymore.

Why shouldn’t you do the same thing? Are you acting illegally? No. Are you using a legitimate law? Yes. Can they stop you from filing for bankruptcy? No. When you are struggling financially, the time has come to file for bankruptcy. Use the same tool that the corporations do. Use the same thinking that the corporations do. Use the same level of responsibility towards your family that corporate boards do towards their shareholders.

Now is the time for you to file. When the next financial crisis hits, you will have no unsecured debt. When you lose your job because of massive unemployment, you won’t have to worry so much about how you will make ends meet. Downsize now to prepare for the future. Put your famliy first. Make the responsible choice. Be a good corporate citizen.

After all, Congress intended bankruptcy as a FRESH START for the honest but unfortunate debtor. They were talking about you.

Finally, the woman who told me at the beginning of the lecture that she was absolutely against bankruptcy? She has an appointment with my office next week.

I wish you all the best of luck out there.

Seattle Bankruptcy Attorney, Jay S. Jump
Law Offices of Jay S. Jump, PLLC
Washington State
Offices in Kent and Davenport

“Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25 percent of a card’s credit line.In a recent mailing for a preapproved card, First Premier lowers fees to just that limit — $75 in the first year for a credit line of $300. But the new law doesn’t set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9 percent.”

First “Premier” targets consumers with poor credit who often rely on it to survive. According to the Business Week article, in a mailing sent to prospective customers in October with the revamped terms, First Premier writes “…you might have less-than-perfect credit and we’re OK with that.” The letter notes that an online application or phone call is still required, but guarantees a “60-second status confirmation.”

After such an alarming story, I thought our readers might enjoy a few more articles about the abuses of the credit card industry. Links below:

Why can credit card companies charge such high interest rates?

Options for getting out of credit card debt

Credit Card, Universal Default

After meeting with a bankruptcy attorney, you will be aware that after you file your case and receive a discharge, most of your debts will be wiped out. This is powerful and inspiring knowledge. The phone calls will come to an end, the minimum payments won’t be draining your bank accounts any longer, if you were sued and a judgment was obtained…..its gone. Don’t abuse the opportunity by using your credit cards if you have made the decision to file for bankruptcy, to do so is fraud that can jeapordize your right to a fresh start. 

Under section 523 of the Bankruptcy Code, non-essential (luxury) credit card debts to any one creditor totaling $500 or more and incurred within 90 days prior to filing are presumed non-dischargeable. Debts incurred at any time prior to filing may not be dischargeable if a creditor can prove that the debt was incurred with no intention to pay. These rules make sense. Going out and buying a flat screen TV on credit two weeks before filing bankruptcy should raise eyebrows. If a creditor notices the purchase, a lawsuit objecting to your entire discharge will likely be filed. The legal fees necessary to defend a lawsuit of this type will far exceed the fee for a typical bankruptcy case. Section 523 goes on to carve out cash advances of over $750 within 70 days before filing as presumably non-dischargeable as well.

If you are currently relying on credit cards to buy the groceries and keep the lights on, it may be a sign that you need to file for bankruptcy. Recent use in good faith does not present a problem, recent use with no intent to pay does. The rule is simple. If you’ve met with a bankruptcy attorney and have decided to move forward with the process, don’t use your credit cards.

John O’Connor

When a person’s liabilities are far greater than a person’s assets, i.e., money and property, they may be a candidate for Bankruptcy. A person filing for a Chapter 7 or 11 should have a good understanding of the types of liabilities that exist. In fact liability is another word for debt, which is also subdivided into two additional categories, secured and unsecured.

A person considering bankruptcy should determine all the debt (liability) they have, and also determine whether it is secured debt or unsecured debt. Chapter 13 bankruptcy is available only to a Debtor who has non-contingent, liquidated, secured debt which is less than $1,010,650.00. The debtor must have non-contingent, liquidated, unsecured debt of less than $336,900.00 to be eligible.

SECURED LIABILITY (debt) is an obligation which is backed up by collateral, like a house or automobile. When filing for bankruptcy, the debtor is required to calculate the dollar amounts which are outstanding on all secured debts. This means that the person filing bankruptcy must calculate the amount of money which is past due and which is owing on every secured obligation they wish to file under Chapter 13 of the Bankruptcy Code.. They should know the exact type of Security Interest, for example, whether the security takes the form of a Lien, an attachment, a uniform commercial code, interest under Article 9, or if the interest is a mortgage on a house.

The debtor should know exactly which property is encumbered by a security interest and the exact date that the interest was given or secured. The applicant should be able to tell the lawyer whether the security interest was voluntary or involuntary as well as detailing the nature of the transaction which led to giving of the interest, i.e., how did the homeowner use money from an equity home loan.

UNSECURED LIABILITY (debt) is the type of debt which may comprise the majority of debt which is owed by a person considering bankruptcy. This is the type of liability which may require partial repayment in a Chapter 13 bankruptcy and which is commonly eliminated in a Chapter 7. The interview with the lawyer should probe deeply into all possible persons, or companies, that could possibly have a Claim against the debtor. The final bankruptcy form should be a list of all debts that are disputed, unliquidated, contingent or joint obligations.

A sample list of common unsecured debt includes the following: rent, medical bills, unsecured bank loans, student loans, taxes, credit cards, loans from family or friends and liabilities for personal guarantees.

The attorney will be able to answer any questions about these issues and assist the petitioner in collecting necessary data.

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