Debt Loading

Debt loading is a practice employed by unscrupulous entrepreneurs and businesses who anticipate filing for bankruptcy. Debt loading works by taking on a debt load by spending all cash reserves, maxing out lines of credit and credit cards, and failing to pay bills in anticipation of bankruptcy protection. Essentially, the business or business owner loads as much debt as possible to their plate before attempting to clear the debt by filing for bankruptcy.

Debt loading can also be used by businesses as a way to earn money from interest payments. For example, if a company takes out loans through foreign associates offshore, it could be considered a debt-loading strategy that allows them to transfer their profits offshores, where tax laws are different, by using interest payments.

Debt loading is not an ethical practice and thus, there are laws to prevent this type of behavior. For example, personal debt acquired within 90 days of filing for bankruptcy may be excluded from legal protection.

In more technical terms, The Bankruptcy Code stipulates many provisions prohibiting a debtor from debt loading prior to filing for bankruptcy. For example, the Bankruptcy Code lists a prohibition against purchasing luxury goods or services that total more than $550.00, also within 90 days prior to filing a bankruptcy case. Additionally, any credit card cash advances are considered non-dischargeable if they are made within 70 days prior to the individual or organization filing for bankruptcy.

As well as being unethical, debt loading may also be considered a civil fraud or even a criminal act, if a judge can determine that the debt was accrued with the intent to discharge through bankruptcy.

Mr. Smith, who owns a business on 5^th Street, where he sells used books, has not been turning a profit for several months. After running the numbers, Mr. Smith realizes that he is unable to pay his bills and maintain his business or personal life. Mr. Smith performs his own research and determines that he should file for bankruptcy in order to clear his debts. However, before filing bankruptcy, Mr. Smith takes out several lines of credit​​​​​​​ against his business and maxes them all out while also spending what little emergency cash his business had on hand. He spends all of his money on a gambling spree, inviting his friends and purchasing expensive food and drink. In order to avoid violating the terms of the Bankruptcy Code, Mr. Smith waits over 90 days before officially filing for bankruptcy.