I have friends who buy into this myth that people who file bankruptcy go out and run up their credit cards right before filing. The truth is that almost no one does this and those few that do end up paying it all back.
In a Chapter 7 bankruptcy, you cannot incur debt with the intention of discharging it in your case. Under section 523(a)(2)(A) of the Bankruptcy Code, a discharge under Chapter 7 “does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by…false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” 11 U.S.C. 523(a)(2)(A).
A great example of a debtor getting nailed by the Bankruptcy Court for going into debt with the intention of wiping it out in a Chapter 7 is the case of Bucciarelli (Bankruptcy Case No. 07-13114). In this case, the Bankruptcy Court in the Newnan Division of the Northern District of Georgia ruled that the debtor could not wipe out legal fees she incurred from her divorce proceedings because she incurred the debt with the intention of discharging it in her Chapter 7 case.
The facts of the case are summarized as follows: In Bucciarelli, the Debtor filed her Chapter 7 case in December 2007. In January 2008, she entered into a contract for legal representation in her divorce proceedings. In addition, she signed a promissory note agreeing to pay her divorce attorney $25,000 for representing her. The promissory note granted her divorce attorney a lien on her interest in her ex-husband’s 401k. Her divorce case never actually went to trial. Her divorce attorney billed her for $35, 625. When the debtor did not pay her divorce attorney, she was sued in Georgia state court. The Georgia state court proceeding was stopped because of her active Chapter 7 case. In response, her divorce attorney filed an adversary proceeding against her to declare the debt nondischargeable.
In Bucciarelli, the Court noted, “To establish that a debt is excepted from discharge under section 523(a)(2)(A), the creditor must prove by a preponderance of evidence that:
(1) the debtor made a false representation, other than an oral statement respecting the debtor’s financial condition with intent to deceive the creditor;
(2) the creditor actually relied on the misrepresentation;
(3) the creditor’s reliance was justifiable; and
(4) the misrepresentation caused a loss to the creditor.”
What sank the debtor in Bucciarelli was the testimony from her “friend.” Her friend testified under oath that Bucciarelli told her that she incurred the legal fees from her divorce with no intention of ever paying it back. The “friend” also testified that Bucciarelli told her that the purpose of her bankruptcy was to discharge all obligations arising from the the attorney fees in her divorce case. The Bankruptcy Court took note that this same friend testified in the Debtor’s favor during the Debtor’s divorce proceeding.
Judgment was entered by the Bankruptcy Court in favor of the divorce attorneys against the Debtor. The debt was ruled to be nondischargeable.