Dear Bankruptcy Adviser,
My friend’s husband (really, not mine) has his own business (in construction) and when it got in trouble he had his married kids take out credit cards and use them to keep the business afloat. We’re talking $80,000 on kids’ cards. Now the kids want the money back, and my friend and husband are thinking of increasing the limits on their own cards to pay off the kids’ cards, and then possibly filing bankruptcy. Any problem with this?
There are many problems with the scenario you have just described. In the eyes of the law, your friend’s husband (let’s call him, “Frank”), is trying to protect one set of creditors (his kids) to the detriment of other creditors (the credit card companies). Frank would be intentionally committing bankruptcy fraud because he is trying to incur debt on credit cards with absolutely no intention of paying that debt back.
The timing of his conduct will be crucial. Simply increasing the limits on his current credit cards so that he can transfer balances may seem like a reasonable decision. However, I hope, the creditors will not approve his application to increase the credit limits.
It is very unlikely that the credit card companies would knowingly approve limit increases if they knew about his failed business. Unless he states he has income that does not exist, then he should not receive any additional credit. His business has just failed; therefore, his income will be limited or nonexistent. The only way he can obtain credit increases is by lying on his application. It is hoped the credit card companies will greatly scrutinize any subsequent bankruptcy filing to see whether he lied on the credit card application.
If he tries to file bankruptcy, he will face two and possibly three hurdles. One, the creditors may scrutinize his petition and try to claim that he unreasonably incurred debt without the intention to repay. Two, each case has a U.S. Trustee assigned. That trustee looks for bankruptcy abuse, and incurring $80,000 of new debt before filing bankruptcy smells of abuse. Third, cases are randomly audited for the purpose of catching abusive filings. The end result could be that he will not be able to discharge any of the debts incurred.
I believe it is one of the most deplorable, irresponsible — and I will say it, pathetic — acts Frank committed. It is even more pathetic that he is trying to stick credit card lenders with the bill. Yes, businesses fail. But there is no excuse to risk his kids’ future because his idea did not work. And even less of an excuse to try and stick creditors with those losses.
I understand a parent helping out a child by adding him or her onto a credit card as an authorized user in order to try to help the child establish credit. A parent often will put a child’s name and Social Security number onto a credit card to let the child piggyback on the parent’s good credit. This is risky, but if the credit card has a low credit limit then the child, it is hoped, will not be at too much risk.
However, this is not what Frank did. He used his children’s credit to start up his business and now his children on are the hook for the failed business. Frank should be on the hook, as well. Eliminating his debt will only fuel the fire for all those opposed to bankruptcy protection in the first place.
Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the ”
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