Client case is unusual. She is young at 28 and owes about $300,000 of credit cards. She used these cards to fund a “gift card” business. What’s a “gift card” business? There are many people who cannot qualify for credit to purchase items like iPhones, TVs, personal computers, and other big ticket items but they want to buy them nevertheless. Client comes into the picture by providing the financing to buy these items. How does she provide the financing? She uses her credit cards to purchase gift cards. These gift cards are then sold to the buyer who wants to buy the TV. In between the ultimate buyer and the client, there are several layers of marketing or distributors of the gift cards. There is one main distributor who is in contact with several wholesalers. These wholesalers are the ones in contact with the ultimate buyers.
Client adds a margin to her credit card costs. The marketers and distributors also add big margins to their costs. The marketers and distributors collect the money from the ultimate buyers, and turn over the collections to the main distributor. The main distributor turns over all the collections to client who uses the collections to pay back her credit cards.
Client makes money, the main distributor makes money, the marketers and distributors make money, and the ultimate buyer is able to acquire the merchandise they want.
This business model has a lot of weaknesses, but it’s a legitimate business enterprise. This is a critical issue in Chapter 7 bankruptcy cases. If credit cards are used to fund a business, the transaction is no longer a consumer debt. The transaction becomes a business debt. $300K used for consumer debt is a big deal and may be used by the U.S. Trustee as a ground to dismiss the Chapter 7 case. But $300K used for business debt is another ballgame because business debt is not a consumer debt! This distinction makes all the difference in Chapter 7 cases. It’s the difference between black and white, or night and day.
If a debtor used $300K of credit cards to travel the world, buy a Porsche SUV, and other personal stuff, the U.S. Trustee can dismiss his case by motion to the court based on the argument that the $300K of debtor is primarily consumer debt. That has been bankruptcy law even under the old law, which was replaced by the new bankruptcy code in 2005.
If client had used the $300K to for consumer purchases, then her case would not see the light of day. It would be subject of a motion to dismiss by the U.S. Trustee.
In this case, client used all of the $300K to finance a business. Of course, given the large amount of credit cards used, we expected the U.S. Trustee to conduct a thorough examination and investigation. At the 341A, the U.S. Trustee showed up and asked client a lot of questions about the nature of the business. UST asked what happened to the main distributor. UST also asked why client did not sue the main distributor and the marketers and smaller distributors to collect the money. UST asked why she went into this business in the first place. Many other questions were asked to probe the veracity of client’s testimony about the business use of her credit cards.
Before the start of the hearing, U.S. Trustee asked me if client was willing to sign documents, which authorized the UST to obtain all of her credit card statements directly from the credit card companies. I said sure. I gave the documents to client who signed all the authorizations and I gave it back to the UST.
After the hearing, UST asked for copies of all evidence supporting client’s claim that the $300K was used for business. Client produced the following evidence:
1) Text through we chat between client and main distributor where orders for gift cards are placed in the hundreds and client confirms availability of gift cards to meet his demands,
2) Receipts from retailers for I-tunes gift cards, staples, etc. hundreds of receipts,
3) Pictures of inventory purchased and sold through the Internet.
Client’s declaration under penalty of perjury was made explaining how the business was conducted and using the foregoing as exhibits. Apparently, client had entered into this transaction with main distributor twice before for $100K each time and there were no problems in 2015 and 2017. These two successful jaunts encouraged her to get into the business a third time. Unfortunately, the third time failed as collections became slower and slower. It was not possible to sue the end users as all of them were contacted through the Internet with no physical addresses.
The hearing was continued for two months. During these two months, client gathered her evidence and we presented them to the U.S. Trustee to prove that client really did use the $300K credit cards for business. Thus, the $300K was not consumer debt but business debt.
The deadline for the UST to file a motion to dismiss based on findings that client did not qualify for discharge expired on August 2. UST did not file the motion. This means that UST is satisfied that the $300K was used for business debt and there was no ground to dismiss the case.
Client will be getting her discharge in due time and she is now on the way to a fresh start in life without $300K of credit card debt! The Bankruptcy court will wipe out all her $300K credit cards. Thanks Be To God! God knows she needs a fresh start with no debt. Imagine being burdened by $300K of credit card debt that never goes away. Nobody needs that kind of pressure and problem in life.
If you need debt relief, set an appointment. I will analyze your case personally.
“God wants to prosper you and not to harm you, to give hope and a future” Jeremiah 29:11
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Disclaimer: None of the foregoing is considered legal advice for anyone. There is absolutely no attorney-client relationship established by reading this article.
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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at
1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803, or at 20274 Carrey Road, Walnut, CA 91789.
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