Insolvency and Adversary Proceedings

[themeis]

Hello again.

For the past two plus years my home has decreased in value to the point where I am in a negative net worth situation (insolvent). However, I have continued to use credit cards to help maintain my normal lifestyle (while still being current on payments) - would a creditor have an Adversary Proceeding Case against me for possible fraud and therefore having the debt incurred over this timeframe declared Non-Dischargeable - since I should have known I was insolvent?

Thank you all for your help.

[justbroke]

No. However, never go around saying "yeah, I'm insolvent but I'm using these credit cards anyway".

Adversary Proceedings (AP) aren't just used randomly. It is only used when there is clear evidence of mischief. You have been paying on time and have not been out buying big screen TVs shortly before filing, the likelihood of an AP is extremely low. Just look at the cases in which they are filed. It's usually large balance transfers or cash advances, or major purchases within months of filing.

[themeis]

Clarification on Post

Thank you JustBroke...

I should have qualified my post by saying that I MAY be insolvent...I never would be spending on cc's if I knew I was for sure. I am not quite sure of the value of my house - however, I wanted to put the question out there just in case it came up in an AP.

Sincerely.

[frogger]

There's lots of things that we all "should" have known. Whether we refuse to accept them, or actually run the numbers up, many times, we just don't "know" until it smacks you right in the face.

You're at the point now where you think that you're sure about your finances. You're thinking about filing bk because you now believe that you're insolvent.

Time to stop with the cards and make your plans.

[justbroke]

Time to stop with the cards and make your plans.

Excellent advice right there. When you finally realize that you're using your cards to survive... you just realized that you're probably insolvent. Don't follow the spiral that led me into bankruptcy. Trying to keep an unoccupied investment property just wasn't worth it in the end. However, I thought I could stay afloat, with credit.

[keptdigging]

The law does not say "insolvency = fraud." Rather case law uses it as one of the factors in trying to determine your "intent." The real issue is: Did you borrow not intending to pay it back. The problem is that no debtor will admit that. And thus you get the factors the court considers, and insolvency is one of them.

In fact, the MBA/econ grad in me knows it's a stupid test. Debts are serviced out of income with assets as just a (poor and generally illiquid) back up. You can be insolvent with zero income and you can be insolvent with $1 Million/year income. But $1M/year income will service a LOT of debt. Lenders know this too (of course): they're not looking for solvency when you borrow, but for income.

And of course a lot of us are insolvent today because our real estate equity dried up. But only the truly obsessive of us know when exactly that happened because it didn't affect our cash flow.

====

Now... nothing I said here was meant to give you permission to go incur more debt. What your negative net worth is telling you is that there will be no refi bailout this time.

And you aren't likely to find fans of using credit cards to maintain your lifestyle here. It's a story we know and we know how it ends. One would like to go their whole life without even knowing the term "Adversary Proceeding."

[JackBondLove]

Insolvency is defined as the state in which a reasonable person does not have a reasonable opportunity to pay off the debt. A person can be upside down in his non-exempt assets vs. debt, and not even at some point instantaneously have the income to support the debt, but so long as it would be reasonable to assume that he could generate the necessary income to pay off the debt (or have a way to refinance the debt with other debt), that is enough to be considered solvent. The point at which the debt is so far progressed, or that a material fact that has changed the reasonable income generation ability of the debtor, that it is no longer reasonable to presume that the debtor can pay off the debt, then that is the point of insolvency.

For example, consider a professional athlete who is cut from a team. If he is still healthy, it would be reasonable to presume that he could find another team to join and continue to generate a high income to satisfy debts. But let's say that he becomes injured so that the prognosis is not good for him to return to playing (i.e., a material change to his income generating ability) - in that case, he would be insolvent for the debts that require a large professional salary.

Obviously for regular folks, so long as person in ambulatory and has not suffered brain damage, it could be presumed that a laid off person could get another job to get the same income that he had before. Or alternatively, a business that has had a bad year can presume that by tweaking the business plan, that revenues can get back to better times. Of course, it may turn out that the employee never gets a good job anymore (e.g., the PhD driving a taxi), or the business never gets good revenue again. So at what point should these folks consider themselves insolvent? Basically when they run out of cash or financing to service the debt.