Why don't most people file Chapter 7 every 8 years?

Question

Please explain to me why more people don't follow a formula like this:

1. Converting all their assets into exempted assets (for which there are tons of options, regardless of your state -- ERISA-qualified retirement plans; annuities; life insurance plans; trusts for their children/themselves; homesteads shared as joint tenancies with a spouse; accounts in the spouse's name; lifetime subscriptions and memberships; gifts to family and reliable friends; LLCs and partnerships; expensive degrees; expensive stuff that is needed for one's livelihood; plastic surgery; dental work; high-quality yet unsaleable personal effects; undervalued art, unmatured antiques; encumbered assets of all kinds...). Then:

2. Opening numerous credit cards and other lines of credit in strategic order, and racking up a giant revolving debt between them, all while using any bankruptcy-vulnerable assets they have to secure still more loans. Then using all this credit -- or things bought on credit and sold for cash -- to

   1. pay for anything owed to children or ex-spouses; to the IRS; to student loans; and for anything else that absolutely must be paid for now; then
   2. to utterly maximize their assets in all the exempted categories proposed above; then
   3. to buy everything they think they might want or need for the next 8 years in the discretionary category, taking care that there is no single item of real value there by making all of it very much their own; then
   4. to travel the world and/or have all the "priceless" experiences they could dream of, with less than zero need to collect a salary; and finally
   5. to retain an excellent bankruptcy lawyer.

3. After 8 years of the fun described above: Filing for Chapter 7 and getting all their debts erased. Then living off the seriously substantial assets they acquired in part (1) for a little while until they can find themselves some more credit with which to repeat steps (2) and (3) until they die.

I thought about the legal and moral side of this plan (which I have no intention of carrying out, since I have assets, thank Gd, among other reasons). I may have a few details wrong, but by and large, the general idea seems to be legal and non-tortious. Lying to the bankruptcy court is not involved at any point. I'd stop short of saying that such a plan is in "good faith," but I don't know that anyone is exiging or even pretending to exige such a thing in the context about which we are speaking. So why not do as I am suggesting--or rather, why don't more people do so?

tl;dr: Why don't people use credit cards to fund bankruptcy-exempted assets, then file for bankruptcy, live off those assets, get new credit and repeat?

*Different but related: Why don't more people run up their credit cards and skip the country?

Somewhat different but related: Why is it possible to just take out a ton of credit cards, max them out and default in 7 years?*

Answer 1

You could get away with stealing some money doing this. However, there are mechanisms in place to limit the damage you could do.

First, you need to have good credit in the first place before you will be able to borrow significant amounts of money. This requires paying bills for a while before you flip the switch and quit paying your debts.

To maximize the amount of money to steal, you would want to rack up the debt in a short window, because as soon as you quit paying on your debts, your credit rating will drop to the point where you won’t be able to borrow any more.

After you file bankruptcy, Chapter 7 bankruptcy stays on your credit report for 10 years. While it is on your credit report, you will be able to borrow almost nothing.

After it disappears, it will take a little time to build your credit up again to a point where you could borrow a significant amount and default again.

So the shortest timeframe you could do this would be something like probably every 15 years or so.

The plan does require lying, at least to every creditor, because when you borrow money, you promise to pay it back, which you have planned in advance not to do.

While you can technically file for bankruptcy as often as every 8 years, your legal history stays with you, and at some point (probably at your second bankruptcy, but certainly the third), the judge will see the pattern and consider denying your bankruptcy on the basis of fraud.

Answer 2

What you are describing is a fairly clear cut case of fraud. There is a big difference between (a) acquiring debt and subsequently being unable to pay it back, and (b) acquiring debt knowing in advance that you never intend to pay it back. The latter is within the definition of fraud for most legal systems. In the UK for example, this would fit within the definition of "fraud by false representation". This is defined rather broadly so that deliberate acts such as the one you describe are caught by it:

(1) A person is in breach of this section if he (a) dishonestly makes a false representation, and (b) intends, by making the representation (i) to make a gain for himself or another, or (ii) to cause loss to another or to expose another to a risk of loss.

(2) A representation is false if (a) it is untrue or misleading, and (b) the person making it knows that it is, or might be, untrue or misleading.

(3) “Representation” means any representation as to fact or law, including a representation as to the state of mind of (a) the person making the representation, or (b) any other person.

(4) A representation may be express or implied.

(Fraud Act 2006 section 2, pursuant to section 1)

In our scenario, the false representation is made when you apply for the debt: you represent that you intend to pay the money back, but you actually have no such intention. Note that the representation can be implied - it doesn't have to be written into the contract, although it almost certainly is anyway.

I'm not familiar with the US legal system specifically but fraud involves essentially the same elements in most jurisdictions; namely, some sort of deception with the intention of making a gain (or causing a loss to the victim).

Answer 3

Other answers have pointed out "what's stopping people from doing it" from the legal perspective.

It is something some people are doing and it isn't clear how many are, aside from extrapolating from bankruptcy filings.

Also think about the user experience, if you are shut out from the credit market for 7-15 years, this will always overlap with defining what you can get out of life. For most people (extrapolated from their earning potential and lack of alternative means), it means living in the bad part of town after being denied the privilege to sign a lease, it means being denied a mortgage. Regaining the flexibility in choices means having a large cash position at all times. It means using your prime age to meet a quality companion all spent living in the least attractive circumstances. Then it means using your children's formative years all spent living in the least attractive circumstances. Then it means doing so again in retirement. There are ways to be content making those kind of choices, it deters most people.

Answer 4

The other answers address a number of reasons that this is a bad/immoral/illegal/unethical idea. I'll touch on one of the specific legal constructs that will make your proposed approach fail.

Clawbacks

A "clawback" is a method by which a bankruptcy trustee can reverse or void certain transactions that occurred before you filed for bankruptcy. Step 1 of your proposed formula is converting your assets to exempted or protected assets, with the idea that they will remain in your possession after declaring bankruptcy.

In general, a clawback will be used by the trustee to reverse any transactions that were used to unfairly protect your assets in anticipation of the bankruptcy filing.

From https://www.alllaw.com/articles/nolo/bankruptcy/clawbacks-preferential-fraudulent-transfers.html:

If you fraudulently transfer property before filing for bankruptcy or pay only your favorite creditors, the trustee can recover the money or property.

The trustee can also use the clawback provision to undo fraudulent transfers of property. In general, fraudulent transfers include those made with the intent to hide assets or transfers of property for less than fair market value prior to bankruptcy.

And from https://www.thebankruptcysite.org/resources/bankruptcy/filing-bankruptcy/the-clawback-provision-preferential-transfers.htm:

In Chapter 7 bankruptcy, the trustee has the right to take back property or money that the debtor improperly gave away before filing. "Clawback" is the term used to describe this power, which allows the trustee to regain assets should have been part of the debtor's bankruptcy estate, but were removed or hidden from the trustee by the debtor by means of preferential or fraudulent transfers.

Summary: Clawbacks will undo most of your Step 1 effort to protect significant assets. Thus, in Step 3 you won't be able to live "off the seriously substantial assets" from Step 1 for long enough to continue the cycle.

Answer 5

There is also another thing - unless you are at the rock bottom of the financial pole and have no intention to ever get more, declaring yourself bankrupt has the side effect of wiping off your assets. You do not want to declare yourself bankrupt if you have a million USD on the bank. It is an emergency setup for people that get messed up by life (which DOES Happen - particularly around divorce situations which can disrupt one's financial setup) or are having a loss and do not make money.

It also has SERIOUS side effects on your career. Ever want to open a business? No, sir, you are not trustworthy. Ever work in a management situation? Same. Doctor? Ah, no - we don't hire people that are broke (yes, that is a thing). Lawyer? Ah, are you maybe disbarred (not sure how this works in the USA, but in germany - you better realize your profession just disappeared). Retirement? Ah, yeah - sure, maybe there is a provision for retirement, but - you will not ever get rich by doing this "strategy".