Court Nixes Credit-Card Transfers in Bankruptcy

(CN) - Debtors cannot pay off one credit card with another during bankruptcy proceedings, the 10th Circuit ruled, because it constitutes an improper transfer of interest in the debtor's property.

Bryan and Julie Marshall had two credit cards with Capital One and two with MBNA, now FIA Card Services. During the 90-day look-back, or "preference," period before filing for Chapter 7 bankruptcy, they used their Capital One cards to make payments on their MBNA cards.

Bankruptcy trustee Linda Parks filed an adversary complaint against MBNA to avoid the payments as preferential transfers.

The bankruptcy court and district court ruled that the payments were not preferential transfers. Judge O'Brien of the Denver-based federal appeals court disagreed.

"When a debtor converts an offer of credit into loan proceeds and uses those proceeds to pay another creditor," the judge wrote, "the debtor deprives the bankruptcy estate of those proceeds.

"Recapture allows all qualifying creditors, including Capital One and FIA, to ratably share in a $38,000 estate asset," O'Brien added.

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