Beware of Cash Advances

Credit card companies often seem to encourage some level of kiting, since they advertise balance transfers, cash advances and devices like so-called “convenience checks” that make moving debt from one card to another easy.

This shuffling of debt can be smart money management, if you’re taking advantage of low promotional interest rates, etc. And, as we’ve noted, even credit counsellors suggest moving credit card debt around to avoid maxing out any one card.

But make sure that you have enough income to cover the debts when you make these moves. Otherwise, it can look like a fraudulent scheme. Another Massachusetts bankruptcy court decision—2004’s MBNA America Bank v. Joan Ashland—offers an example of this.

Joan Ashland and her husband, John, owned their home in West Yarmouth, Massachusetts, where they lived with their three young children. There were domestic difficulties and John left the home about November 2001. He failed to make regular child-support payments; and Joan, who’d worked as a “personal care assistant”, could no longer take overnight assignments since her husband wasn’t home with the children. This sharply reduced her income.

John left a number of items behind when he left. One was a balance on a “Citi Drivers Edge Gold Card.” Although the card was in his name, both spouses had used it. By agreement between them, Joan had made the payments on the card and she’d never been late.

However, in February 2002, the issuer notified Joan that it intended to increase the rate on that card from 8.9 percent to 25 percent, based upon other aspects of her credit history. As a result, the payment which she was accustomed to make would result in a monthly principal reduction of only $2.

Meanwhile, her money problems were mounting. She made an appointment with a bankruptcy lawyer and took stock of her finances.

Some months earlier, Joan had obtained a credit card from MBNA. That card was in her name only.

Each monthly statement from MBNA was accompanied by three checks, called “convenience checks.” These checks could be used by the card holder for debt consolidation or consumer purchases. Their amounts were applied against the card’s credit limit and carried a low promotional interest rate.

Dismayed by the increased rate on the Citi card, Joan took advantage of the MBNA convenience checks. In late February, she used a check for more than $7,000 to pay off the Citi card balance.

A few weeks later, she deposited a second MBNA check for about $3,000 into her bank account. She used the funds for mortgage payments, a dentist bill and a retainer to…the bankruptcy lawyer.

Joan and her bankruptcy lawyer discussed various options. In mid-March, just a few days after using the second MBNA check, she gave her lawyer authority to file bankruptcy on her behalf.

Joan testified that, when she used the convenience checks, she intended to repay MBNA. But the meetings with the bankruptcy lawyer undermined that claim. The judge found Joan’s testimony “less than credible” and ruled:

[Joan Ashland] was planning bankruptcy at the time that she used the convenience checks. …The representation was made with intent to deceive.

So, the debt she’d run up on the MBNA card would stay in place, even after her bankruptcy.

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