When a proprietor operating a business in New York filed for Chapter 11 bankruptcy protection, one of his creditors alleged that he was concealing a fraudulent scheme. According to Westfair Online, a Colorado credit-card processing company accused the Empire State businessman of racking up $1.8 million in debt that he purportedly generated through a Ponzi scheme involving two companies that he owned.
The credit-card processor approved an application to provide merchant services to the man’s ink-and-toner business, which it alleges was actually a secondary front operation for the man’s primary transactions. The creditor suspects that the businessman created fake invoices to disguise credit-card transfers as toner sales. Allegedly, he used the credit-card payment system to raise cash for his personal expenses and to fund his operations under the guise of bona fide sales.
The creditor suspected fraud when the businessman increased his credit card sales, and then numerous chargebacks for undelivered sales began coming in. The credit-card processing service alleges that more than $1 million of the chargebacks were actually from the business owner, his wife and local associates.
The creditor tried to collect on the debt owed for the chargebacks and entered into a dispute over non-payment, which the businessman included in his bankruptcy petition. To prevent an automatic discharge of its debt through the bankruptcy process, the credit card processing company filed its request for relief with the court. The Colorado merchant-services company seeks to prevent its debt from getting discharged and to continue pursuing collections actions against the New York businessman.
Creditors listed on a petitioner’s bankruptcy documents have the right to contest the discharge of debt in court. With the number of bankruptcy filings expected to increase, as reported by the New York Post, creditors may need to take some proactive measures to protect their right to collect. In some situations, however, raising suspicions of fraudulent activity in court might be necessary for a creditor to continue pursuing collection efforts against a debtor.