Month: August 2009

I sometimes get questions from our readers with questions and answers that seem to be so obvious. However, I get these same questions over and over again that apparently many people are not sure about it. The email I received from a reader illustrates this point:

“I was a gambler and a year ago I had personal problem in my life. I got so depressed that I almost committed suicide. Just because gambling helped to ease my depression I got hooked.  I ended up with bills on my credit card for cash advances of $150,000 … and because the economy is so bad they cut our hours of work from full time I only work as a part time now… I was still paying for my bills until I cannot afford anymore because of working part time. I was thinking about filing for bankruptcy but I don’t want to get in trouble. I’d like to pay my bills but I cannot afford it anymore. Because of what I owe can I go to jail for that? I used to take home $4000 mo now I am lucky if I take home $2000 now. Sometimes it’s just enough or sometimes I’m still short. … Can I go to jail for that? …. If they garnish my paycheck, me and my son will be living in the street but I’m scared that they might put me in jail and who is gonna take care of my son. That’s why I’m scared to file bankruptcy. Please tell me more… “ 

This question is not very unusual as credit collectors oftentimes perpetuate this myth. Credit collectors do make calls to debtor’s place of employment or home numbers and leave threatening message. They try to intimidate debtors to pay up or threaten them with arrest or imprisonment.

Fortunately for debtors there are no debtor prisons in the US. There have been no debtor prisons in the US for the past 150 years.  Some countries may still place a debtor in prison for failing to pay a debt.  However, debt is not criminalized in the US. In order to go to prison you must be convicted of a criminal behavior.  Failing to pay a debt is not a criminal behavior.

What will most likely happen with credit card debts is that the creditor will sue you in court to collect the obligation. Through this judgment the creditor can then garnish your wages or get liens on your properties.  However, getting to this point is a very time-consuming and costly affair for the creditor. Hence, unless you owe a huge amount and/or you have assets they can run after, it is usually very costly for creditors to go to court to collect from debtors who have no assets. Specially, considering that debtors with no assets can easily file for bankruptcy and get rid of these debts anyway.

In case of secured obligations, such as a home mortgage or car loans, the creditor’s remedy is to foreclose on the home or repossess car. Creditors cannot put you to jail for failing to pay their secured obligations.

Many people have lost their jobs, have had unexpected medical problems, or just had financial investments gone bad. A debtor in such a situation who can no longer make the minimum payment is not a criminal and cannot go to jail for these reasons.  Collection agencies, however, will do anything they can to compel payment from the debtor.  You cannot go to jail if you cannot pay your financial obligations. That is precisely the reason why we have remedies available such as bankruptcy and debt settlements. If a debtor does nothing about it, the worse that will happen to the debtor is a ruined credit score!

A client came to me this week with a not so typical financial question.  This case involves a single mother who is gainfully employed and has a good credit record. She has a couple of department store credit cards as well as the usual Visa and MasterCards.  She carries minimal balances on her credit cards that she pays off every month.

A few months ago she had a medical issue. She went to the emergency room and had some medical and lab tests performed on her.  She was in and out of the hospital for about a few days.  Fortunately, the medical tests found nothing wrong with her. She turned out okay and her medical issue was resolved.  However, unfortunately for her, the medical and lab tests done on her were so expensive that she ended up with medical bills of more than a hundred thousand dollars. After so many weeks of trying to collect from her the hospital gave her a final demand letter to pay the bill or face a collection lawsuit.

There is just no way that she can afford to pay the medical bill as her income is just enough for her family to survive on.  This client has already decided that filing for bankruptcy is her only option. However, she did ask around and among the many “advice” she got from friends was that she should just use up all the available balance on her credit card before filing for bankruptcy.  Should she do so?

“Charging up” your credit card before filing for bankruptcy may seem like an inviting proposition.  After all, it does not matter whether your obligation is $100,000 or $200,000. These credit card bills (and other unsecured obligations) will be wiped out in a Chapter 7 filing anyway.  So why not go on a vacation courtesy of your credit card? Why not buy the newest and biggest flat screen TVs that your credit card will allow? And, while at it why not just go ahead and make cash advances and send some of it to your family or relatives in the Philippines?  Indeed, why not?

The reason why it is not such a good idea to run up credit card obligations in anticipation of filing for bankruptcy   is that those credit card obligations may possibly turn out to be nondischargeable on the ground of fraud. The bankruptcy trustee can review your purchases prior to filing for bankruptcy and may make these debts nondischargeable.  The banks themselves may also file for Adversary proceedings in bankruptcy court to contest the dischargeability of these debts. Hence, you may still end up being liable on these fraudulent debts despite the bankruptcy filing; and, worse, may also result in having your bankruptcy case dismissed.

Under the Bankruptcy Code there are presumptions that can be inferred from certain actions of a debtor.  For example, the Bankruptcy Code presumes it to be fraudulent and therefore nondischargeable: if: (a) a consumer incurs a debt to any single creditor totaling $500 for luxury goods or services incurred within 90 days before the filing; and, (b) cash advances on credit card obtained within 70 days before the filing are also presumed to be nondischargeable.        

It does not look good if you run up your credit card obligations in the months prior to filing for bankruptcy. It looks even worse if you take out cash advances, purchased luxury items or simply run up a lot of debts or exhaust your credit limits.  These actions raise the presumption of fraud and may adversely affect your bankruptcy filing.

Advice and concern you receive from friends may indeed be genuine and, on the surface, may also seem to be reasonable. However, outdated or wrong information that you receive may have severe consequences on your financial life.

(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old.  Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)