Discharging credit card debt

03 Jun Discharging credit card debt

The circumstances in which you used your credit card may bear on whether the card debt is dischargeable in bankruptcy. Section 523 of the Bankruptcy Code excludes from the scope of the discharge debt incurred by fraud. Let’s look at how fraud could be implicated when you swipe that plastic.

One species of credit card fraud involves lies on the application made to get the card in the first place. I’ve only encountered that once in 29 years of practicing bankruptcy law: my client had created an utterly fictitious job for himself as a president of a fictional company making a bundle of money each year. He then ran the card quickly to its limit and filed bankruptcy without mentioning the circumstances surrounding the debt. We stipulated that the debt was non dischargeable.

Another form of fraud is the card holder who leaves his bankruptcy attorney’s office having decided to file bankruptcy. There is some credit available, he thinks, and proceeds to charge the card up to and sometimes beyond its credit limit. That’s clearly a debt made without a present intent to repay, which is the standard for non dischargeable fraud in the 9th Circuit.

The tougher factual situations are those where the debtor is taking cash advances to pay other card payments. Or is unemployed, and uses the card as a plastic safety net, to pay for groceries, gas and medical care. The more serious the debtor’s total financial situation, the harder it is to argue successfully that the debtor had a well grounded intent to repay.

Some courts find that the subjective intent to repay is not a defense if objectively, it is clear that the debtor cannot repay. Other courts require that, at the moment of the transaction on credit, the debtor hold an intent not to pay.

Next time, I’ll look at strategies to increase the odds that credit card debt is discharged in a bankruptcy.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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