What are the Ramifications of Cash Advances

By Donald A. Hayes, Attorney at Law


 

Section 523(a)(2)(C) of the Bankruptcy Code specifies that cash advances on credit cards aggregating more than $1,000 which are obtained within 60 days prior to the filing of bankruptcy are presumed to be nondischargeable. The creditor can file a complaint to determine dischargeability of that specific transaction in the bankruptcy case. The burden is then shifted to the debtor to produce evidence to rebut the presumption of nondischargeability. Ultimately the burden of persuasion is always upon the credit card company to establish that the debt should not be discharged. The law was enacted to prevent debtors from Aloading up@ or going on buying sprees in anticipation of bankruptcy.

To obtain judgment the creditor has to prove the following: (1) that debtor made false representations; (2) that at the time they were made, debtor knew them to be false; (3) that debtor made representations with the intention and purpose of deceiving the creditor; (4) that creditor justifiably relied on the representations; and (5) that the creditor sustained injury as a result of the representations.

In a recent case entitled Cameron vs. First Deposit Bank, decided March 1998, the court held that a credit card issuer failed to establish that at the time the Chapter 7 debtor accepted the issuer=s preapproved offer to balance transfer from her accounts with other card companies to her account with issuer, that she had any intent to defraud. When she accepted the offer to balance transfer other card balances to the issuer card, the issuer did not justifiably rely on any fraudulent representation by the debtor. The reason is that the issuer failed to make any meaningful examination of debtor=s financial status at the time it extended this preapproved balance transfer to her. Instead, as is usually the case, the issuer just sent her checks in the mail encouraging her to use them. The issuer must utilize the opportunity to make at least a cursory examination or investigation of debtor=s representations in order to claim that they justifiably relied on debtors representations. Merely reviewing a stale original credit card application is not enough. The court found the balance transfer to be dischargeable and awarded the debtor her attorney’s fees as well.

In the case of Chase Manhattan Bank vs. Poor, the debtor used her credit card to pay off different credit cards through a $3,400 balance transfer. The court held that the balance transfer did not qualify as a Acash advance@ within the meaning of the code and hence found it dischargeable. It went on to explain that the balance transfer did not increase her overall debt, instead it was just a substitution of creditors, she did not receive any cash to spend as she pleased, and the balance transfer was not part of a pre-petition buying spree, even though the credit card issuer purportedly treated balance transfers as cash advances internally and under terms of cardholder agreements.

What is the significance of all this. When a debtor has cash advanced or run up his or her credit card shortly before bankruptcy for luxury items, the debtor is likely to get a complaint from he issuer Card Company. However, the debtor may want to balance transfer the entire balance over to another card or cards, thereby not having to list that creditor in their bankruptcy. The new creditor will now even look into what charges were balance transferred thereby eliminating any potential problem.