I Recently Financed a Purchase, Can I File Bankruptcy?

If you recently financed a purchase, e.g., a home, car, furniture or appliance, you should definitely speak with your attorney.  Any purchase made within the 90 days prior to filing bankruptcy may be considered a fraudulent transaction.  Depending on the amount of the purchase or how the funds were obtained to finance the purchase, the Court and/or your creditors could argue there was fraudulent intent even beyond the 90 days.

Family in Front of House

There are several things the Court may consider when someone purchases an asset shortly before filing bankruptcy:

Was the purchase for a necessity? If you financed a vehicle because your previous car had a major mechanical problem and needed costly repairs, you may be able to explain why it was necessary to make the purchase shortly before filing bankruptcy.  The same may be true if an appliance, e.g. your refrigerator, stopped working.

Was the type of purchase reasonable? Did you purchase a used 2006 Honda Odyssey or did you purchase a new 2011 Hummer?  You needed a vehicle large enough for your family of five, but you must use the reasonable test.  The 2006 Honda will probably serve your family’s needs and be a bit more economical than the 2011 Hummer.

Was the financing completed with a legal process? This is best demonstrated with two examples.

If you went to your local dealership and obtained financing, you will probably have no problems with the financing following all of the legal steps.  The only question for this type of financing is whether the dealership and their finance company should have known you were insolvent, bankrupt, at the time they provided the loan to you.  This is an issue that could be played out in the bankruptcy court, but in most cases is not an issue.

If your brother-in-law gave you a $10,000 loan to purchase that used car and did not put a lien on the title of the vehicle, you and your brother-in-law will have some concerns and issues after you file bankruptcy.  Without a valid lien on the title, the loan is not considered a “secured” loan but an “unsecured” loan.  In other words, your brother-in-law cannot legally repossess the vehicle if you fail to make payments to him.  In your bankruptcy, he would be treated like a credit card or medical bill and paid nothing or only a percentage of the amount owed to him depending on the type of bankruptcy you file.  In addition, you may not be able to fully protect the equity in the vehicle.  In that situation, the bankruptcy Trustee could actually sell the car and use the proceeds to pay your creditors.  Needless to say, you or your brother-in-law will be happy with this outcome.

How was the asset purchased? If you recently purchased an asset and charged it on a credit card, you may be required to repay the debt.  If you used a credit card to purchase that $10,000 car with hopes of discharging or eliminating the debt in bankruptcy, you should think again.  Any purchase on a credit card will be reviewed, but any large purchase will most certainly be scrutinized by the credit card company and their attorney.  You can expect a lawsuit in bankruptcy, also known as an adversary proceeding, to be filed against you by the credit card company.  They will argue this debt should not be eliminated in bankruptcy and they will most likely win that argument.  Similarly, if you decided to remodel your home and purchase new stainless steel appliances on your credit card, that debt will most likely not be eliminated.  You may even find that the credit card used to purchase those items is considered a secured creditor.

Was the purchase used to protect an otherwise unprotected asset in bankruptcy? This approach is most often taken by someone who thinks he or she understands the implications of filing bankruptcy.  Again, an example is the best way to explain.  A person had $20,000 in stock that could not be protected in bankruptcy.  Rather than lose the stock, the person decided to cash out the stock and use it as a down payment on a new home.  Now the $20,000 of stock is invested in the home.  It is no longer an unprotected asset, since the person can use his homestead exemption, currently $35,000 for an individual and $70,000 for a couple in North Carolina, to protect the equity in his home.  But not so fast, the person must disclose the sale of an asset within two years of the bankruptcy filing.  Failure to disclose the sale of the stock within the two years would most likely be discovered on review of the person’s tax returns.  Needless to say, the Court would almost certainly see this as an attempt to defraud or perjury if it were not listed on the bankruptcy filing.

Not all purchases financed shortly before filing bankruptcy are problematic, some are for legitimate reasons.  However, you should expect any purchases financed within three to six months of filing bankruptcy to be scrutinized.  This timeframe could be for even longer if the assets purchased were for large dollar amounts or items not necessarily considered a necessity.  You should obviously discuss any recent purchases with your attorney.