Avoiding pre-bankruptcy temptation and “luxury” goods

It does not matter why. It does not really matter “what” very much. Section 523(a)(2)(C) precludes the discharge of debt associated with the purchase of any luxury item, items or luxury services purchased from a single creditor that aggregates $500.00 or more within 90 days of filing a bankruptcy. The way the statute reads, it is the debt that must combine to more that $500.00 so it would arguably not apply to a purchase of something where $400.00 was on credit and a a hundred or more was in cash or check. The problem is that the code does not define the term “luxury”. So, for my client who was recently separated from their spouse and needed a new bed to sleep it, it is a toss up as to whether the item was a luxury or not. If they purchased a bottom line bed, they probably have nothing to worry about. If they purchase one of these fancy top of the line beds we see on T.V. all the time, then there is a good chance it will be deemed a luxury item.

The consequences for buying a luxury item within 90 days of a bankruptcy are not so harsh for someone like this client that needed a bed. Basically, there is a presumption under the code that they will still have to pay that particular debt. Well, if the Debtor acted in good faith in making the purchase, this will not be a surprise and hopefully they will be able to afford that debt once others are gone. However, for the person who thought, “I’m gonna file bankruptcy soon anyway, what the heck – I’ll buy stuff and get the best!” Well, for them it will be downright disappointing. Furthermore, if they cannot afford even that one debt, the bankruptcy discharge will not prevent judgments and garnishments down the road.

The bigger concern is that such a purchse raises the specter of fraud in the minds of creditors and the trustee. That could move the Debtor from the relatively mild sanction of Section 523 over to the harsher consequences of Section 727. This section of the bankruptcy code operates the prevent a discharge or ALL debts. So, if you suspect that bankruptcy is looming for you, avoid making credit based purchases from a single creditor of $500.00 or more. If you cannot avoid it, then it is likely not a luxury item, but you still need to be aware, just like with my client and the bed, that buying the best may move you from the necessity arena over into the luxury arena in a hurry. Also, this applies to services so, I recommend not getting a lot of massages or pedicures on credit on the eve of filing a Chapter 7 bankrutpcy.

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