On the Eve of Bankruptcy, Replacing Non-Dischargeable Debt With Loans Is Tempting... Skip to main content

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On the Eve of Bankruptcy, Replacing Non-Dischargeable Debt With Loans Is Tempting...


But you must resist!

You've caught on to the fact that certain kinds of debts are "better than others." Knowledge is a good thing, but don't get confident that you'll be able to pull a fast one by trading off a non-dischargeable debt for a dischargeable one. The consequences simply aren't worth it. Here again is another great reason to count on an experienced bankruptcy attorney when filing your case; he will help you act strategically to maximize the benefits of bankruptcy while helping you avoid the pitfalls and mistakes.

Most loans are unsecured and will thus be discharged altogether in most Chapter 7 cases, and discharged after successful completion of the payment plan in a Chapter 13 bankruptcy. With this knowledge, some people get the bright idea to, for example, take out a new credit card, max out the cash advance, and use that to pay some non-dischargeable debt. They then file for bankruptcy hoping nobody will catch on. Huge no-no.

If you file for bankruptcy and the person who made that loan to you can prove that you were already contemplating the bankruptcy, he can petition the court to have the discharge denied on the basis of fraud. Even worse, he may be able to persuade the court to deny discharge altogether, not just for his debt but for all your debts. A Chapter 7 or 13 bankruptcy can be outright dismissed on bad faith grounds if the creditor can prove what you did.

To prove a fraud claim, the creditor will need to show that, at the time you took out the unsecured loan, you did not intend to pay it back, so obviously the court is going to consider things like the interval between the loan and your bankruptcy filing. This is a huge headache you don't want for your case.

Yet another reason you want to avoid one of these shady deals is that some of the debts you are trying to pay off may be priority debts, and if left unpaid, they could help you pass the means test. In other words, by paying down the priority debt with an unsecured line of credit, you might make yourself ineligible for a Chapter 7 altogether or make a Chapter 13 much more costly than it needs to be. Examples of priority debts include taxes, child support, alimony or personal injury claims arising from driving under the influence.

You might also want to keep in mind that the trustee can take back payments made to non-dischargeable unsecured creditors made within 90 days of the bankruptcy. So let's say you take out a cash advance, use the money to make a big payment on your non-dischargeable student loan, and then file for bankruptcy. If your trustee decides to take the payment back, you still owe the original creditor, PLUS now you owe a new guy you took out the cash advance with. What a waste!

Trickery looks inviting, but it can land you in big trouble. Play it safe and stay away from anything that looks like fraud.

If you're in North Carolina and considering filing for bankruptcy, contact the Law Offices of John T. Orcutt today. With convenient offices in Raleigh, Durham, Fayetteville and Wilson, call +1-919-646-2654 to set up your free initial debt consultation.

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