If you’re considering filing bankruptcy, what debts can you incur and which should you avoid? What are the possible consequences?
Two weeks ago we listed 5 crucial things you’d benefit from learning about if you’re thinking about bankruptcy:
- if bankruptcy is indeed the best option for you
- how Chapter 7, 11, 12, and 13 work, and whether one is right for you
- what actions you should take to position yourself for either a possible or definite filing
- what you should avoid doing
- the best timing for your bankruptcy filing
We covered the first 2 of these back then. Then last week we got into # 3 and #4, actions you should take and those to avoid before bankruptcy. We focused on keeping, and not selling or giving up your:
- especially any retirement funds
- collateral on debts, such as your home, vehicles, or furniture
But there are many other actions that could be smart to take or to avoid as you’re contemplating bankruptcy. Consider the following questions. Should you:
- take on more debt to buy time and maybe avoid filing bankruptcy?
- file unfiled income tax returns and/or prioritize paying unpaid income taxes?
- catch up on late child or spousal support payments?
- file for divorce before or after filing bankruptcy?
We’ll cover the first of these today, the rest in upcoming blog posts.
Taking on More Debt
Taking on more debt can take many forms. Whether doing so is smart depends on which form it takes. It also depends on each person’s own circumstances.
Here are some of the most common forms:
- increasing unsecured debt from present creditor(s), such as adding to present credit card(s)
- getting new unsecured debt, such as accepting a new credit card offer
- getting new secured debt, such as buying a vehicle or furniture on credit
- increasing or getting new “priority debt,” essentially income taxes or child/spousal support
Let’s look at the first two of these today, involving increased or new unsecured debt.
Increasing Present Unsecured Debt
If the goal is to improve your financial situation, digging a deep financial hole deeper seldom works. It’s seldom a successful recipe for avoiding bankruptcy. But there may be exceptions.
Most of the time the decision to go deeper in debt is an act of near desperation. It’s generally not a well-thought out decision. You don’t have enough in your checking account to get something you need (or believe you need). So you put it on the credit card. You know it puts you further behind but you feel you don’t have much choice.
Or sometimes you do have a plan, or at least an attempt at one. You sit down (by yourself or with your spouse or a significant other). You look at your bills and the rest of your financial life and try to figure out what you should do about your increasing debt. You may tell yourself, for example, that you’ll keep on adding to your credit cards for no more than 2-3 more months. Until you get back to work, or into a better paying job, or until you pay off another debt and free up some cash flow. And if those things won’t happen then you’ll think about getting bankruptcy advice.
But whether you’re adding to your debt impulsively or following a plan, it’s really hard to know if you’re doing the right thing for yourself. It’s almost impossible to be objective because these are really personal, emotion-driving circumstances. There’s almost always a lot of fear and hope involved. Your self-esteem is on the line. And it gets crazy complicated if there’s a spouse or other loved one deeply involved. These are not good environments for making good decisions.
Getting New Unsecured Debt
The situation is similar if you have the opportunity to get a new source of unsecured debt. You wonder if it makes sense to transfer some of your current debt to the new source of credit. It may have a lower interest rate, or better payment terms, at least for the short term. Consolidating all or part of your unsecured debt seems to make sense. It looks sensible for the short term, and you hope it will help you make long term progress on your debts.
Or again, maybe you just can’t meet your expenses this month and feel you have no choice. So the new source of credit enables you to get by for another month or two.
Risk of Challenges to Discharge of a Debt
But incurring new debt can be risky ahead of filing bankruptcy. This is true if it’s additional debt on an existing account. The creditor could challenge the “discharge” (legal write off) of recently incurred debt in your bankruptcy case. The recent debt could be considered fraudulent. The argument would be that you incurred it without intending to pay it or any sensible ability to do so. (See Section 523(a)(2) of the U.S. Bankruptcy Code.)
That could be especially problematic if you are consolidating a lot of your debt with a new creditor or on a new account. Such actions could convert debt(s) that you could have legally discharged into one(s) you cannot.
Again, the larger the amount of the debt you recently accrue the greater this risk. The more that is at issue the more likely the creditor would raise the challenge. And of course the more the amount of the money the more you may still owe in spite of filing bankruptcy.
Rare Challenge to the Discharge of Any Debts
In certain (admittedly rare) circumstances taking certain actions before or during a bankruptcy could be even more dangerous. Lying on bankruptcy documents, hiding assets and such, could threaten your ability to discharge ANY of your debts. (See Section 727(a) of the Bankruptcy Code.)
Incurring a significant amount of new debt soon before filing bankruptcy might also run you afoul of this provision.
The Best Pre-Bankruptcy Advice
It’s near impossible to know whether in your unique circumstances it make sense to incur a certain debt or not. As we said above, it’s hard not to act mostly out of hopes and fears—to be driven by such emotions. Even if you have the discipline to stop and try to figure things out, it’s still difficult to be objective.
Then if you do get your head and heart in the right place, you still don’t have information you need. Under what circumstances would incurring a new debt result in the creditor’s dischargeability challenge of that debt? What debt amounts and their timing would likely be okay and what would not? What debt actions by you would be acceptable and what would not?
The answers to these questions turn on your individual circumstances. The only source of the right answers to your truly unique questions is your bankruptcy lawyer.
Under the counsel of a lawyer, you’ll cut through the emotions to an objective analysis of your situation. You’ll get the information you need—the law as it applies to you—leading to answers to your questions. You’ll know better what debts you can incur and those you shouldn’t.