Recently, we discussed the reasons a creditor can object to the dischargeability of debts in bankruptcy. One of them was “false pretenses, a false representation, or actual fraud,” and in two specific situations special rules apply. One is when the petitioner’s debts are owed primarily to a single creditor, aggregated to more than $650, and were spent on “luxury goods or services” within 90 days of the bankruptcy filing. (11 U.S.C. § 523(a)(2))
New Yorkers who rely on their credit cards for day-to-day purchases might want to know what the Bankruptcy Code means by “luxury goods and services.” Further down in the same statute, the Code states concisely, “[T]he term ‘luxury goods or services’ does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.”
That definition might not be very helpful given that it’s negative, i.e. it is very clear on what luxury goods and services are not. However, that really shouldn’t matter. Rarely do adversary proceedings delve into the minutiae of whether a series of purchases are luxuries. It’s usually pretty obvious from context.
That said, there are a couple more things to know about the “luxury goods and services” rule.
(1) Thankfully, it is indexed to inflation. The Bankruptcy Code lists the amount as $500, and before April 2013, it was $600. Although, in 2005 Congress reduced it from $1,000.
(2) Debts for goods and services that are owed to more than one creditor but altogether exceed $650 are excluded from the rule. This isn’t an endorsement of obtaining multiple lines of credit and charging a modest amount of luxuries to all them, but it does mean that there might be some situations in which debtors might end up not running afoul of the rule who would have had they charged the purchases to only one creditor.
The “luxury goods and services” rule is designed to prevent people from charging expensive restaurant meals or vacations to a creditor and then discharging the debt soon after. It won’t be applied to debtors who are buying necessities like gasoline and groceries. Since few debtors purchase luxuries on credit before bankruptcy, an adversary proceeding over the debt usually doesn’t arise. If it does though, then it’s important to hire an experienced New York bankruptcy lawyer.
For answers to more questions about credit card debt, adversary proceedings, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
