Can I Borrow Money Before I File Bankruptcy?

Sometimes folks considering filing bankruptcy are in an incredibly tight financial spot, and ask me if they can continue borrowing money before they file for bankruptcy relief. The short answer is “not usually, no”, but it gets a bit more complicated than that, depending on the person’s needs, the type of debt they seek to incur, and what they’re disclosing to the people from whom they would like to borrow.

First, let’s look at the classic story many have heard – which by the way seems to almost never happen in the real world – about racking up credit debt for food, clothes, jewelry, whatever, then filing bankruptcy. This sort of behavior is textbook fraud, which Sec. 523(a)(2) of the bankruptcy code makes “nondischargeable.” This means that the debt cannot be voided by a bankruptcy filing. There is an important catch though – the person or company who was defrauded almost always has to file an adversary proceeding in Bankruptcy Court within 60 days of the first date set for the meeting of creditors, or the debt goes away regardless of any fraud.

The person who has been defrauded has to also prove there was a false representation or false pretense, and that the person justifiably relied on the statement to their financial detriment. There are slightly different rules when an allegedly false financial statement is at issue, and there are “presumtions of nondischargeability” in this section when luxury items or cash advances are made in certain amounts within 70 – 90 days of filing a case.

So that  usually leaves out a very common form of borrowing – getting a loan from a family member before you file. While I cannot ethically advise someone to borrow money to file a case, if they would like to do this, and if they tell the person that this debt will be included in their bankruptcy discharge, there is no issue with borrowing in this instance. If you borrow money to pay your attorney, you must disclose this on your “Statement of Financial Affairs” and in your schedule of debts, but that’s all.

What about buying a vehicle before you file? This can get a bit trickier, since lawyers are prohibited from advising a client to borrow money when the “impelling reason” for borrowing money is the contemplation of a bankruptcy filing. But perhaps you truly need a reliable vehicle, but also need to file bankruptcy. In such cases, this borrowing can often be condoned, because you are borrowing money for a need you have separate from bankruptcy, and because the lender will still have a right to repossess the vehicle for non-payment. There are also options for keeping such debts from discharging, such as by signing a reaffirmation agreement, or by paying for the vehicle directly at contract rates during a chapter 13 bankruptcy case.  Nevertheless, if you are considering filing bankruptcy, but also think you may want to finance an auto loan – or just have questions on any possible future debts you may have – definitely talk with a competent bankruptcy attorney before signing a contract, swiping a credit card, or borrowing any more money.