10 Dec How To Miss Out On Discharging Credit Card Debt
Lots of people in financial trouble hang on through the holiday season before taking up bankruptcy as part of the New Year. (I haven’t seen many people give themselves a bankruptcy filing for Christmas, though, for many, it would be objectively the best thing under the tree.)
If bankruptcy may be in your future after the holidays, it pays to know how credit card debt is treated in bankruptcy. Welcome to the short list of ways to miss out on discharging credit cards in bankruptcy.
In the typical bankruptcy, credit cards make up the largest part of the unsecured debt. The basic premise in bankruptcy is that unsecured debt is dischargeable unless it appears on the list of non dischargeable debts in Â§ 523(a). As the heading to the statute says, non dischargeable debts are exceptions to the rule of dischargeability.
There are two basic ways to blow your chance to discharge the balance on your credit card in bankruptcy:
- Lie on the credit application to get the credit
- Use the card fraudulently
Lie to get the card
If credit was granted to you on the basis of a false application , there’s a risk that the entire balance on the account could be non dischargeable. Suppose that you misstated your income , assets, or employment status to look more credit worthy. Those misstatements fall within the exception to discharge for debts created in reliance on a false statement in writing.
Practically, I’ve only seen this kind of challenge once in 31 years of bankruptcy practice. The card application was submitted within months of the bankruptcy filing and the entire picture of the applicant in the application was a fabrication.
I have my doubts that most card issuers can retrieve a copy of the application or are much exercised about proving up misstatements, when there’s another route to saving their claim from discharge.
Use the card fraudulently
Credit card charges may survive a bankruptcy filing if they were incurred by false representations or actual fraud. Since no one plunks their card down with the announcement that they don’t really intend to pay the issuer, courts have had to find ways to infer what’s in your head when you make that purchase with plastic.
The legal fiction that has grown up is that when you present your plastic to pay for a purchase, you make a representation that you intend to pay the issuer. If that weren’t so, the entire credit card industry collapses.
Credit card issuers, then, are looking for evidence that the bankruptcy debtor didn’t intend to pay. They look to the facts that appear on the card statement and ask courts to infer from those facts the debtor’s state of mind.
What triggers the assumption the use was fraudulent?
- Dramatic run up in account balance shortly before bankruptcy filing
- Purchase of non essentials
- No payments after significant purchases
- Going over limit
- Continuing use right up to bankruptcy
This list isn’t exhaustive, but it touches the things the creditor can see from its records and use to form a conclusion that the debt wasn’t incured with an intention to repay. Here’s more factors courts consider when looking for fraud.
Part of my charge to clients when we first meet to discuss bankruptcy is to stop the use of credit cards. It is hard to argue to a judge that even though you’ve met with a bankruptcy lawyer, you really did intend to pay when you swiped your card the next week for a weekend getaway.
Another time, we’ll talk about responding to the charge that card use was fraudulent.
In the mean time, if you are considering filing bankruptcy, remember that your use of your credit cards, even within the card limits, is subject to scrutiny in your bankruptcy case. If proven fraudulent, those charges may be with you for the New Year and beyond.
Image credit:Â© yellowj – Fotolia.com
Cathy Moran, Esq.
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