In this post and two others that will follow, I will be discussing twelve potential bankruptcy traps for anyone thinking about bankruptcy in the Tacoma area. Note: Most of these traps are easily avoided. Frankly, many of these traps apply to consumers nationwide, but I wrote these posts with Tacoma filers in mind. The first three traps are as follows:
1. The Cash Advance on the Credit Card
Once you opt to file for bankruptcy, it really is time to stop using credit cards. If you take out a cash advance on your credit card within seventy days before filing your bankruptcy, the Washington bankruptcy court will start from the premise that the cash advance debt will not get eliminated in your bankruptcy.
This doesn’t mean you could be stuck with all the debt on your card, just the part that was too close to your filing. The fact is though that you would not get stuck with this debt unless the credit card company actually made it an issue. The credit card companies rarely come into the Tacoma bankruptcy court to object to discharge of this part of your debt on this issue.
Like I said, if the credit card company doesn’t raise the issue, the debt still goes away. Still why even go there if you can avoid it?
If the credit card company doesn’t do this, the debt goes away with all of the others.
2. Luxury Buys
In the Tacoma Bankruptcy Court, the presumption is that if you use your credit cards to buy “luxury items” in the ninety days prior to your bankruptcy filing, the debts for these items do not get discharged in bankruptcy. You will notice that “luxury goods” is in quotation marks.
What does the Tacoma Bankruptcy Court deem a luxury item? The Bankruptcy Code doesn’t tell us exactly what constitutes a luxury item, but using your card to buy necessities like gas to get around, food for your family is not going to get yours into trouble.
Just like with cash advances, the credit card company has to actually come into the Tacoma Bankruptcy Court and file a formal objection to these specific charges being discharged in order for “luxury purchases” to become an issue. If they don’t, the debts are just eliminated.
Obviously, this is not something where you want to play the odds. If there have been purchases that you are worried about, make sure that you talk to your bankruptcy attorney about them before filing.
3. Payments to Friends and Family within 1 Year Prior to Your Bankruptcy Filing
Many potential bankruptcy filers feel awful about not being able to pay back all of their debts, particularly the debts owed to family members and close friends. Unfortunately doing so can result in costing you a good bit of money. So much for good intentions.
The issue is that under the bankruptcy code, family members and close friends are “insiders.” If you make payments on a debt to an “insider” in the year prior to your bankruptcy filing, those payments are deemed “preferences” and can be recovered by the bankruptcy trustee.
For example, let’s say you owe your sister $2000 and you have been making monthly $100 payments to your sister for the last year. As a blood relative, your sister is considered an “insider” and all of the payments you made on the debt you owe her can be recovered by the bankruptcy trustee. The trustee can literally ask your sister to turn all of that money over to them and then the trustee will take the cash and disburse it to your creditors. If she doesn’t turn over the money, the trustee sues her.
Thankfully, most bankruptcy trustees in Tacoma will give you a chance to pay the money to the trustee so that they don’t have to bother your loved one. Obviously, once you know you are filing bankruptcy, the first thing to do is stop repaying debts to “insiders.”
Stay tuned for the next installment of Tacoma bankruptcy traps.