By Kitty J. Lin
How do you have money to on vacation but no money to pay your debts? In case you did not know this previously I am going to let you in on a not so secret rule in bankruptcy: it is generally not a good idea to go on vacation right before filing for bankruptcy. Doing so may look like and be an abuse of the bankruptcy process and your case may be dismissed or the discharge of your debts denied.
Pursuant to 11 U.S.C. §707(b)(1) the court may dismiss a case “if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Whether the court finds abuse depends on the circumstances of each case. If the circumstances are the fact that you really needed to have a vacation (with no other explanation) then it probably does not bode well for your bankruptcy case. Essentially you are taking a vacation at the expense of your creditors that you are alleging you cannot afford to pay anymore. Rather than paying for your vacation you could have used those funds to pay some of your creditors. If you are going out of town for a legitimate reason, such as work related reasons (for example, you have to pay all the expenses yourself but your employer will reimburse you in the future) or if there are family emergencies (for example, a loved one is very sick, or you are going to a funeral) then you can explain those reasons to the judge to dispute the motion to dismiss or claim of abuse. If a motion to dismiss is filed in your case pursuant to §707(b), it is highly advisable that you seek the services of a bankruptcy lawyer to help you oppose the motion.
If you used your credit cards during the vacation right before filing your case the problem may gave just become worse. Creditors could file an adversary proceeding against you to have that debt or all of your debts be deemed nondischargeable pursuant to 11 U.S.C. §523(a)(2) due to fraud or 11 U.S.C. §727. An example of fraud is if you rack up your credit card debt for luxury goods within 90 days prior to filing for bankruptcy. What are considered luxury goods? Luxury goods are anything that is not reasonably necessary for the support or maintenance of you or your dependents. Going on vacation, big screen TVs, electronics, nice purses, jewelry or shoes may be examples of luxury goods.
You may be asking yourself: “How does the United States Trustee or a party in interest find out you went on vacation or spent money on luxury goods?” There are a variety of different ways they may find out. Most Chapter 7 trustees require that your Bay Area or San Jose bankruptcy attorney submit bank statements as part of the documents to be sent to the Chapter 7 trustee after your bankruptcy case is filed and before your meeting of creditors. Even if you paid for your vacation with cash or by debit card from your checking account, the Chapter 7 trustee will see the transactions at the location you are withdrawing the money (for example, if you withdrew cash out of the ATM in Hawaii, it will show cash withdrawal in Hawaii). Or if you withdraw a huge chunk of cash prior to going on vacation the Chapter 7 trustee may question what the huge chunk of cash may be used for. Of course, if you are using your credit cards, it will show up on your credit card statement. If the Chapter 7 trustee finds something suspicious from the documents provided he or she may inform the United States Trustee. The United States Trustee is normally the one who will file motions to dismiss your case for abuse of the bankruptcy process under 11 U.S.C.§ 707. Other parties in interest (i.e. your creditors) may also have the right to file an objection based on abuse of process under 11 U.S.C.§ 707.
Why would buying luxury goods on your credit card before filing bankruptcy be considered fraud? It is presumed to be fraud because it looks like you are taking advantage of your creditors. If you know you are going to file for bankruptcy and you max out your credit card balances it is considered fraud because you “borrowed” the money without ever having any intention of paying the money back. Of course, buying luxury items within the 90 day window is only presumed to be fraud, but you can always dispute the presumption by providing proof that at the time you used the credit cards you had every intention of paying the money back. You can show this in several ways: providing evidence that you have been making your payments every month, providing evidence that you had funds to pay back the credit at the time you made the purchases, or anything else that proves you had the intention of paying back the debt. If something happens afterwards that changes your financial situation such as a decrease in pay or loss of job that makes filing for bankruptcy a necessity you can explain that situation to the judge to dispute the presumption that you committed fraud. You should consult with a bankruptcy attorney to help you if you have an adversary proceeding filed against you for nondischargeability of a debt due to fraud.