Evaluating credit card discharge issues
Credit card issuers sometimes challenge the discharge of their debt in
Chapter 7 by filing an adversary proceeding claiming that the debt was incurred
by fraud and therefore should be excluded from the discharge. This is
sometimes called a "non-dischargeability action".
Credit card debt may be non dischargeable in bankruptcy under either of two
legal theories:
 | The application submitted to get the card was fraudulent
|
| The card was used fraudulently |
This issue arises only in Chapter 7 since in Chapter 13, even debts tinged
with fraud are dischargeable.
Hot buttons for card issuers
While each card issuer has a different practice about non dischargeability
actions, each of the following circumstances probably increase the
likelihood that the debt may be subject to challenge by the creditor:
| Increase in credit card usage shortly before filing
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| Newly issued card
|
| Large cash advances in months before filing
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| Use of card for recent travel or vacations
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| Pattern of borrowing on one card to make payments on others
|
| Exceeding credit limit
|
| Using card when unemployed or without reasonable belief that the debt can
be repaid |
Generally, the longer the length of time between any particular use and the
bankruptcy filing, the less likely the usage will trigger a challenge to
dischargeability.
How judges decide if
the debt was incurred by fraud, thus barring the discharge of the debt in
Chapter 7.
What options are available
If you are concerned about a challenge by a credit card issuer to the
discharge of a particular debt, there are several strategies available:
| Wait to file bankruptcy so as to put more time and/or more payments on the
account between usage and filing.
|
| Settle with any objecting creditor if and when they file a non
dischargeability action
|
| If non dischargeability actions are filed, convert the case to Chapter 13.
|
| Contest the suit at trial: if you win, you may recover your
attorney's fees incurred to defend the action.
|
| File Chapter 13 where even debts that may have been incurred fraudulently
are dischargeable. |
Bankruptcy Fraud
A creditor may challenge the discharge of a debt in bankruptcy if it believes
the debt was incurred by fraud.
In the credit card context, that usually means that the creditor alleges that
either the card was obtained by using false information, or, more
frequently, that the use of the card by the debtor was fraudulent.
Just claiming that the debt was incurred by fraud is not enough to except the
debt from discharge: the creditor must present facts that prove fraud at
trial.
Factors suggesting fraud
To decide whether a credit card charge was incurred by fraud,
judges sometimes use a checklist of factors that suggest fraud, since
there is seldom explicit evidence of dishonesty.
Those factors which the court weighs in making its decision are
:
-
the length of time between the charges and the bankruptcy
filing;
-
whether or not an attorney had been consulted concerning the
filing of bankruptcy before the charges were made;
-
the number of charges made;
-
the amount of the charges;
-
the financial condition of the debtor at the time the
charges were made;
-
whether the charges were above the credit limit of the
account;
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whether the debtor made multiple charges on the same day;
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whether or not the debtor was employed;
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the debtor's prospects,
-
whether there was a sudden change in the debtor's buying
habits; and
-
whether the purchases made were luxuries or necessities. See
In re Dougherty, 84 B.R. at 657.
The factors used vary from circuit to circuit and the exact
standard (if there can be said to be an "exact standard") differs
depending on where the bankruptcy is filed.
If these issues are pertinent to your situation, get good
bankruptcy advice.
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