There are numerous ways that debtors filing for bankruptcy might abuse the system with fraudulent activity. Hiding assets from creditors is a common scheme since people don’t want to give up their property but still want to receive a discharge of their debts.
However, it is possible for people to abuse bankruptcy proceedings in other ways. Someone intentionally racking up debt after they have decided to file for bankruptcy is a prime example of an abuse of this important legal system. If a creditor has reason to suspect fraud, they may be able to prevent the debtor from discharging their debt.
When might someone’s financial actions involving credit extended by your company mean that they cannot discharge your debts in bankruptcy?
When people spend large amounts on luxury items
An item does not have to be from a prestigious brand for it to constitute a luxury item in bankruptcy court. Any non-essential spending involving at least $725 of debt with a single creditor in the 90 days before someone’s bankruptcy filing might affect whether that person can discharge the debt.
There is a presumption that such spending will preclude the debt from discharge because that behavior constitutes fraud. The more someone spent using credit from your company before filing for bankruptcy and the more frivolous the purchases, the harder it will be for the debtor to justify those purchases.
When someone obtains a cash advance
Rather than using a revolving line of credit to make purchases before bankruptcy, some people will take cash from their creditors, which is easy to set aside during bankruptcy.
It is common for companies that offer financial services to charge fees and higher interest rates for cash advances. However, someone intending to file for bankruptcy won’t care about those charges. If someone withdraws $1,000 or more in cash advances within 70 days of their bankruptcy filing, that could also constitute fraud and prevent the debtor from discharging those amounts.
Even if the last uses of the line of credit aren’t quite that egregious, you may still be in a position to file a request for a hearing and ask the courts to make your debt non-dischargeable in the bankruptcy. Learning more about how bankruptcy law protects you as a creditor can help you respond appropriately when someone tries to discharge their debt to your business.