March 18, 2009 – Credit cards may have helped put a client into bankruptcy, but they won’t pay for the way out. Lawyers are strongly advised not to take credit cards as payment for bankruptcy services.

“In addition to what I would also consider the actual fraud of using a credit card to pay for bankruptcy, [section] 523 [of the bankruptcy code] has presumption of fraud for recent credit card use prior to filing,” said Michael J. Maloney of the Watton Law Group in Milwaukee.

“That is a fairly blatant intent not to repay,” said Peter Seguin of Mudge, Porter, Lundeen & Seguin, S.C. in Hudson. “Speaking from experience, [a credit card payment for a bankruptcy filing] will likely draw an adversary [complaint] from the credit card company.”

Even worse, a lawyer taking credit card payment for bankruptcy services could be considered a conspirator in the fraud if the lawyer knows the client does not intend to pay the debt, warns Benjamin Payne of Hanson & Payne, LLC, in Milwaukee. “It’s never good to become a party in one of your own cases,” he said.

But as simple as this advice may be, putting it into practice can be harder than it seems.

“Several years ago this unwittingly happened to me,” Seguin said. “My office staff took a credit card payment for a bankruptcy fee and only informed me that the client had paid the full fee, but not that it had been on their credit card – which I would not have accepted had I known. Immediately after filing, the adversary complaint was served on me and the client repaid the amount to the card company without challenge. I didn’t want to challenge it then and I wouldn’t want to try it now.”

Maloney warns that an attorney cannot be comfortable even with a client paying with cash for bankruptcy services. “I have never accepted a credit card but once had a client who, unknown to me, took a cash advance from a credit card to pay my fees,” he said. “The end result was a nondischargeable debt. Now I always ask where my clients get the money to avoid that in the future. Even cash from our clients is not safe sometimes.”

An attorney would be well served to have a client paying with cash to sign a statement that the funds did not come from a cash advance or credit card.

But aside from credit cards, there can be circumstances where a client might appropriately incur debt prior to bankruptcy, said Len Leverson of Leverson & Metz, S.C., in Milwaukee.

For example, a debtor may incur secured debt such as a new car loan that the debtor fully intends to repay and which is prudent for the debtor’s circumstances, Leverson said. A debtor may also borrow from parents to fund a bankruptcy retainer, having given full disclosure to the parents of the intent to file, he said. The debtor may also refinance a mortgage loan to get a lower interest rate, with the intent of paying the debt, he added.

The preceding discussion occurred on the Bankruptcy, Insolvency, and Creditor’s Rights Section e-list. An e-list is an open e-mail exchange among members on topics relevant to the law section hosting the forum. To find an e-list particular to your area of law, visit the WisBar.org. Some e-lists require section membership.