The Danger of Using Credit Cards To Make Payments Before Bankruptcy
You have fallen behind on your bills. Your monthly income is not enough to meet your monthly expenses so you start to live off credit cards. You use your credit cards to pay for groceries, utilities, car payments, rent, and other things. Sometimes you use cash advances on the cards to pay for some items, other times you can just swipe the card. When minimum payments come due you don’t have enough money to make them yourself, so you use cash advances on the other cards to pay the minimum balance on one card. Later, you have it so that when one card which carries your entire credit balance comes due, you pay it off with a cash advance from another credit card, thereby moving the entire credit balance to another card. Finally, when you want to file for bankruptcy one credit card at the end of your balance-transfer scheme carries a balance of tens of thousands of dollars. You’re ready to file for chapter 7 bankruptcy, so what’s the problem?
Credit Card Kiting & Fraud
The scenario just described is called credit card kiting. The potential problem with credit card kiting in bankruptcy is that the resulting debt may be excepted from discharge due to fraud. In plain terms, fraudulently incurred debts are not eligible for discharge in bankruptcy, and by using cash advances from one card to make minimum payments on another card you may have been inducing the credit card company to give you credit by falsely representing that your accounts are in good order given the minimum payments, when in fact you did not have the money and never intended to repay the entire balance the whole time. The statute which may pose a problem is Section 523(a)(2)(A) of the Bankruptcy Code.
Treasury Issues $1T in New Debt in 8 Weeks—To Pay Old Debt
By Terence P. Jeffrey - November 28, 2014
During those eight weeks, Treasury took in $341,591,000,000 in revenues. That was a record for the period between Oct. 1 and Nov. 25. But that record $341,591,000,000 in revenues was not enough to finance ongoing government spending let alone pay off old debt that matured.
The Treasury also drew down its cash balance by $45.057 billion during the period, starting with $126,568,000,000 in cash and ending with $81,511,000,000.
The only way the Treasury could handle the $942,103,000,000 in old debt that matured during the period plus finance the new deficit spending the government engaged in during was to roll over the old maturing debt into new debt and issue enough additional new debt to cover the new deficit spending.
This mode of financing the federal government resembles what the Securities and Exchange Commission calls a Ponzi scheme. “A Ponzi scheme," says the Securities and Exchange Commission, “is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors,” says the Securities and Exchange Commission.
“With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue,” explains the SEC. “Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”
In testimony before the Senate Finance Committee in October 2013, Lew explained why he wanted the Congress to agree to increase the federal debt limit—and why the Treasury has no choice but to constantly issue new debt.
“Every week we roll over approximately $100 billion in U.S. bills,” Lew told the committee. “If U.S. bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance.”
“There is no plan other than raising the debt limit that permits us to meet all of our obligations,” Lew said.
“Let me remind everyone,” Lew said, “principal on the debt is not something we pay out of our cash flow of revenues. Principal on the debt is something that is a function of the markets rolling over.”
The vast amount of debt that the Treasury must roll over in such a short time frame is driven by the fact the Treasury has put most of the debt into short-term “bills” and mid-term “notes”—on which it can pay lower interest rates—rather than into long-term bonds, which demand significantly higher interest rates.
At the end of October, according to the Treasury’s Monthly Statement of the Public Debt, the total debt of the federal government was $17,937,160,000,000.
Of this, $5,080,104,000,000 was what the Treasury calls “intragovernmental” debt, which is money the Treasury has borrowed and spent out of trust funds theoretically set aside for other purposes—such as the Social Security Trust Fund.
The remaining $12,857,056,000,000 was “debt held by the public.” This part of the debt included $517,029,000,000 “nonmarketable” Treasury securities (such as savings bonds) and $12,340,028,000,000 in “marketable” Treasury securities, including bills, notes, bonds and Treasuring Inflation-Protected Securities.
But only $1,547,073,000,000 of the $12,857,056,000,000 in marketable debt was in long-term Treasury bonds that mature in 30 years. These bonds carried an average interest rate of 4.919 percent as of the end of October, according to the Treasury.
The largest share of the marketable debt--$8,192,466,000,000—was in notes that mature in 2,3,5,7 or 10 years, and which haf an average interest rate of 1.807 percent as of the end of October.
Another $1,412,388,000,000 of the marketable debt was in Treasury bills, which carry “maturities ranging from a few days to 52 weeks,” says the Treasury. These $1.4 trillion in short-term Treasury bills had an average interest rate of 0.056 percent as of the end of October, according to the Treasury.
The continual rolling over of these short-term, low-interest bills helped drive over the $1-trillion mark the new debt the Treasury had to issue in the first eight weeks of this fiscal year.
The Treasury has taken out what amounts to an adjustable-rate mortgage on our ever-growing national debt.
If the Treasury were forced to convert the $1.4 trillion in short-term bills (on which it now pays an average interest rate of 0.056 percent) into 30-year bonds (on which it now pays an average interest rate of 4.919 percent) the interest on that $1.4 trillion in debt would increase 88-fold.