Debts tinged with dishonesty are part of a small group of claims where the creditor has to take action in the bankruptcy to avoid their discharge. Most debts that are non dischargeable in a bankruptcy case are so just because of the nature of the debt: recent taxes, family support, drunk driving judgments.
A second group of non dischargeable debts may not be obvious on their face, and a creditor holding such a claim has to file an adversary proceeding in the bankruptcy case to establish that the debt the creditor holds fits within the “bad behavior” group of non dischargeable debts. 11 U.S.C. 523 makes the following non dischargeable upon proof: fraud, conversion, embezzlement, larceny, breach of fiduciary duty and willful and malicious injuries to person or property.
Credit cards provide the fact pattern in which this issue arises most often. Use of a credit card when the card holder had no intention of repaying the charge or when the individual should have known he had no ability to repay the debt may be fraudulent. Yet such a debt will be discharged unless the credit card company files a non dischargeability action within the short time frame provided in the Code. The creditor must not only file the action but must be able to prove to a judge that the debt was incurred by fraud.
Creditors and judges usually have to look to issues of timing and financial condition to decide if the debtor’s use of a card at the time the charge was incurred was honest. Red flags are purchases on the eve of filing; big charges; luxury goods; big dollar cash advances; and going over limit. Those situations are not conclusive that the use was fraudulent, but they are the things that usually trigger an investigation by the credit card company and sometimes a challenge to the discharge of those charges that seem tainted.
Note that a challenge by the card issuer as to the discharge of its claim has no impact on the discharge of the balance of the debtor’s debts.