I need your help: AP Threat

[GoodSon]

Hello everyone. Thanks in advance for reading this post.

My wife and I have been drowning in credit card and student loan debt for years. Around early April, we filed Ch. 7 BK. A week or so after our 341 meeting, our attorney's paralegal emails us asking about a transaction from November. She attached a letter from the lawyer representing MBNA (BOFA). They are threatening AP. Let me explain the situation:

For years, we have been trying to "do the right thing". We had been doing the Dave Ramsey thing and cut all of our cars up. In November, we got balance transfer checks from BOFA. Our limit was $30,000. We had about $50,000 in CC debt at the time. We thought it would be great to pay the 3% fee to get 0% for 13 months. The rep asked if I wanted to pay the cards off directly, or get the money in my account. Since I no longer had the cards and didn't know the numbers, I opted to get the deposit directly into my account. As soon as I received the money, I went onto those websites and paid off 3 (or 4) cards, as evidenced by my bank statements.

For the next few months, I made payments on the card. After a few months, I called and told them I think I may have a few issues with payments coming up, and I wanted to be pro-active (my wife and I were expecting-baby came in early March). But they were not hearing any of it. So I just stopped paying, and using money in areas in which I felt took first priority.

I then thought about BK again, but quickly brushed it off. Then one day, I was reading that many people who file, their only regret is that they didn't file sooner. So, we went ahead and did it.

Now this. There is ZERO way that this was fraud or abuse. Absolutely no way they can prove it (plus it was not within the 70/90 days). Some people are saying my attorney dropped the ball. When I first met with him, he asked if there have been any BTs recently, I said yes. But that was it. He never asked anything else about it. Hindsight, I should have waited a few more months.

If I was trying to commit fraud, I could have done what some people have done: use CC to pay off cars/student loans/degrees, etc. But that was not on my mind. I was simply trying to lower my interest rate to get out of debt faster. And as my bank statement shows, the money I received immediately went to pay off other unsecured debt.

In their letter, they mention "misuse". This is ridiculous. But my attorney immediately signed an $8000 offer they made. I am not signing. I think I can pay his $2000 fee, win, and get my $2000 back from them. Again, I had NO CLUE we would file when I got this BT. Plus, I did not enjoy any of it for personal use.

What do you all think? Sorry for the book.

[Peeps]

You might be facing a tough fight. Balance transfers are not in the same category as new purchases so the 70/90 presumption of abuse rule doesn't afford as much protection as one would hope. They don't necessarily have to prove fraud; demonstrating your actions caused them financial damage might be enough.

Based on the detail you provided, it appears that you were just shy of 6 months in between your balance transfer some time in November and your BK filing in early April. Did I read that correctly?

You made a few payments, which is good. Unfortunately, the amount of the transfer and the short period of elapsed time might work against you, even if you did make some payments. Showing that you used this money to pay off other cards isn't going to help much. It might even look like preferential payments to some creditors at the expense of another creditor in the eyes of a judge.

This might be harder to win than you think. Your legal fees could really add up. Worst case, you might be on the hook for more than the $8k settlement if you lose the battle. I don't envy the decision you have to make. It's a tough position to be in. I wish you the best of luck.

[GoodSon]

Thanks for your reply.

Yes, I was about a month shy of the 6-month window, a window I had no idea existed, and that my lawyer never mentioned.

It is weird about preferential payments, because why would I pay off creditors then file BK? If I planned to file, then of course I would have never paid off these creditors.

This is hard. Should I just wait it out and see what they do? Do they have a ROCK SOLID case?

[debee]

If it were me, I would not sign. If they want to file a 523 objection, let them do that first. A lot of creditors play this game and it goes no further.

There's a clear crumb trail leading from your account into the pockets of the other creditors. Balance transfer only superficially disguised as a cash advance. If any of that took place inside the preference window, not your problem. The trustee can force everyone to empty their pockets and dump it in the common pot and then stand in line for their share. It won't impact you or your discharge.

If it were me, I'd be playing chicken. Even if they file an AP, I think you can win. So long as your attorney is up for the task. Maybe refer him to Des for some spring-training.

[GoodSon]

Thanks debee. That is rreally encouraging. I just can't wait for this to be over. I really wish I would have never did the BT, but of course, I didn't know at the time. Also, I wish I would have waited to file. But I didn't know at the time. If I spent that $29k on goods and services, then of course I would be elated to accept $8000. But I was just trying to get out of debt. I honestly was trying to do the "right" thing.

I'm not going to sign. I can't afford $200 a month for 40 months. Not even close.

[GoodSon]

If they do file the objection, and I want to settle, will their $8000 offer go up, down, or stay the same? Once they do file (if they do), who has more bargaining power, me or them?

In my heart, I feel I have a strong case. But then again, I don't know much about BK law.

[Peeps]

Personally, I don't think it's a "rock solid" case. But it's not exactly weak, either. If I was standing in your shoes, I would probably wait it out, as you say, just to see if they put any more cards on the table. It's hard to tell if they will really pursue this. It might not be worth it to them. They've made a first gesture, that's all. But if they DO stand behind it and if you DO choose to fight it, plan on it being a challenging fight. Luckily you'll get a lot of wisdom and insight from the forum... people who have been through similar experiences and people who have solid legal backgrounds. It's kind of late and it's a holiday weekend so the feedback might be a bit slower-in-coming than normal, but it will come. Hang in there.

[debee]

Most (if not all) courts have concluded that balance transfers are not fraudulent.

It's very common for people in the months before bankruptcy to transfer high interest balances onto 0% cards. What you did was move the debt around. It's not as if you took a big cash advance and went to Fiji, came home and filed. You didn't. You saw a lifeline in the 0% offer, you grabbed onto it (like a million others before you) and after hanging there for a few months you realized it was too little, too late.

In fact there are cases where the balance transfer was done in the 90 days before debtor filed and the trustee was able to recover the money (as a preference) and then take his share and redistribute the rest equally between all the other creditors. No impact on the debtor whatsoever. No fraud, no problem, no 523.

ETA: If they were to file an AP (remember these 523 threats are common), you will have more power because that is when you get to tell your side to the judge. Once it comes out that you used the money to pay off other dischargeable credit card balances, it will be clear that it's not fraud.

[tobee43]

i would speak with your atty once again about this.

fraudulent transfer or preferential transfer by the debtor prior to the filing could really only be their argument, and the creditor, still should have to be included with that "90"day period prior to your filing. also, i don't know exactly how they would consider it fraud, most difficult to actually prove. if you will this ap....the creditor must pay the legal fees and i think you have a shot at it based on the information you provided. best of luck!

[despritfreya]

GS

In your PM, you asked me to comment. I felt replying to the thread would be more helpful in the context of the other responses.

This issue is not so open and shut. If B of A files a 523 action it will be under 523(a)(2)(A) - use of the credit card based upon a false pretense, false representation or actual fraud. The timing of the use of the card is not relevant and there is no such thing as a "6 month" waiting period. While it is true that the more time you put between the use of the card and the filing of bk may help in getting a creditor to "look the other way", there is no “outside time period” rule as it relates to a creditor’s right to file a 523(a)(2)(A) matter.

Under Grogen v Garner, 498 U.S. 279 (1991), for there to be a 523(a)(2)(A) claim, the creditor must show:

1. A false representation;
2. That the debtor knew the representation was false;
3. That the debtor intended to deceive by making the false representation;
4. That the creditor relied upon the false representation and;
5. That the reliance was justified.

The Circuits have interpreted this differently. I tried to research your Circuit but my wonderful State Bar's web site is not working - go figure - so I do not have access to the Fast Case research portal.

Some Circuits (minority) hold that by simply using the credit card, the user makes a representation that they have the ability to repay the amount taken and that the creditor has justification to rely on such a representation. Other Circuits (majority) do not. Why the card was used (balance transfer) is not relevant as such is not one of the 5 enumerated elements of proving a 523(a)(2)(A) claim. The determination of whether or not there was a false representation at the time the card was used is a question of fact and will be borne out in discovery. The problem is that defending such an action is costly. Can you do it yourself, yes. Should you, no.

If this was a case I was handling:

1. I would advise my client to do nothing until a timely 523 complaint is filed. We would not even respond to “the letter”. “Creditor, if you think you have a claim, file the complaint. Otherwise, go away.”
2. If a complaint is filed and we were dealing with $30k my client would have to decide if settling would be more cost effective. Typically my firm’s fees run between $10k and $15k (depending upon how much discovery is done) to defend to trial a 523(a)(2)(A) claim. If we win, great. If we lose, the chances are my client will also be responsible for the creditor's fees which may be more than ours. Due to the risk, we would probably try to settle. This is what the creditor is counting on because the creditor knows the risks as well. So, unless the creditor was trying to make "an example" out of you (this does happen), you should be able to settle for something less than the full $30k. Will it be the current offer of $8K? Probably not but if they fail to file the complaint then waiting saved you $$. Tough call.

I hope this helps.

Des.

[GoodSon]

Des, your post was VERY informative. I appreciate it!!!

My lawyer charges $2000 for AP defense, with $1000 being up front. Does this help?

[despritfreya]

My lawyer charges $2000 for AP defense, with $1000 being up front. Does this help?

If this is what he charges for the entire defense of an AP (plus costs like copies of depositions) then maybe you proceed with defending. It is still a tough call since, if you lose, you may have to pay the creditor's legal fees which, I can assure you, will not be capped at $2,000.00.

Des.

[debee]

Your whole case hinges on whether or not the creditor can prove that you made a knowingly false representation when you used the card. The onus is upon the creditor to prove that you used the card and you did not intend to repay the debt. How are they going to do that? (keep this question in mind)

When looking at your case, the court will be using the standard of "common law fraud". The court will consider all the facts and foremost among them is the fact that you used the money to pay down pre-existing dischargeable debt and did not acquire any new benefit (other than a lower payment). This goes in your favor. They will look at the timing between card use and filing; whether an attorney was consulted before card use; the number of charges; their amount; your financial condition at card use; whether you went over limit; whether multiple charges were made on the same day: whether you had a job; your financial sophistication; and whether you purchased luxuries or necessities.

They will consider all the other facts and circumstances in your case to determine whether you knowingly gave false representation of your intent to repay when you used the card.

The creditor must convince the court with evidence that you acted in bad faith, knowingly using the card with no intent to repay. This is not an easy thing to prove.

You rolled high interest debt over onto a 0% card, made payments for a few months until discovering you were pregnant and then changed your financial plans at that point. The fact that you paid until then is proof of your intent to pay. The baby is your saving grace because it is a trigger event akin to sudden job loss or illness.

If they file an AP, I see you prevailing.

[GoodSon]

OK, so a hearing has been set for November 7. Does anyone have any idea what will happen here???

TIA

[ValleYum]

What kind of a hearing was set?