What are some of the legal concerns that can result from unwise use of credit by businesses and consumers?

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djwalker1 eNotes educator| Certified Educator

Many individuals and businesses are turning to bankruptcy as a solution to problems stemming from unwise use of credit. Perhaps the biggest concern when considering bankruptcy is to be sure the debtor can file with a clear conscience. Here are two big mistakes to avoid when contemplating bankruptcy.

The first mistake is taking out debts with the anticipation of later having those debts discharged in bankruptcy. There is a temptation to go wild with purchases on credit while never intending to pay back the money, depending on bankruptcy law take care of the bill. This is considered fraud under bankruptcy law, and is punishable by imprisonment and/or heavy fines.

The second thing to be avoided is for a debtor to hide assets from the bankruptcy court. Assets are important in a Chapter 7 bankruptcy, because the debtor’s assets are liquidated (sold off) and the money is used to pay off whatever debts the funds can cover. Any debts still remaining after liquidation are discharged (wiped out). The good news is that may assets, such as one’s home and many personal belongings, are often exempt from being sold off. If the bankruptcy trustee finds that the debtor has no assets that can be sold, the debts are still discharged. You can see where this might tempt one to not list a second house, or large jewelry collection, or some other valuable asset that is not otherwise exempt.

Penalties for filing a fraudulent bankruptcy petition can include up to five years in prison and fines of up to $250,000.