Legal Definitions - new-debtor syndrome

New-Debtor Syndrome refers to a situation where a person or entity files for bankruptcy in a way that suggests they are abusing the legal system, rather than genuinely seeking relief from insurmountable debt. This "bad faith" conduct often involves actions taken shortly before the bankruptcy filing, specifically designed to manipulate the system, shield assets, or avoid legitimate debts. If a court determines that new-debtor syndrome is present, it may dismiss the bankruptcy petition, meaning the filing is rejected and the debtor does not receive the protections or discharge of debts that bankruptcy typically offers.

Here are some examples illustrating new-debtor syndrome:

• Example 1: Strategic Asset Transfer

  Imagine a business owner, facing mounting debts for their struggling company, decides to transfer ownership of their valuable personal vacation property and a high-end classic car to their spouse for a token amount of money. This transfer occurs just a few weeks before the business owner files for personal bankruptcy. The court might view this as new-debtor syndrome because the owner appears to be deliberately moving assets out of their name to prevent creditors from accessing them, rather than genuinely seeking a fresh start.

• Example 2: Reckless Debt Accumulation

  Consider an individual who knows they are on the verge of bankruptcy due to job loss and medical bills. In the month leading up to filing their bankruptcy petition, they take out several large cash advances on credit cards and purchase expensive, non-essential items like luxury electronics and designer clothing, with no realistic intention of repaying these new debts. A court could interpret this behavior as new-debtor syndrome, as the individual intentionally incurred significant debt without a legitimate purpose, solely to have it discharged through bankruptcy, demonstrating bad faith.

• Example 3: Creation of a Shell Entity

  A person with substantial personal assets but also significant liabilities quickly establishes a new limited liability company (LLC) or an intricate trust structure. They then transfer a large portion of their personal wealth into these newly formed entities, making it appear as though they personally own very little, just days before filing for personal bankruptcy. This maneuver could be seen as new-debtor syndrome because the primary purpose of creating the new entity and transferring assets seems to be to shield those assets from creditors during bankruptcy proceedings, rather than for a legitimate business or estate planning reason.