Dischargeability and Credit Cards

By Donald A. Hayes, Attorney at Law




Bankruptcy Code ‘523 (a)(2) makes obligations incurred through fraud non-dischargeable. The three basic types of fraud include: (1) fraud other than a statement concerning the debtor=s financial condition in order to procure credit; (2) a written statement respecting the debtor=s financial condition that is materially false, on which the creditor reasonably relies, made with the intent to deceive the creditor; and (3) for obligations incurred for luxury goods and cash advances aggregating more than $925 made within 70 days preceding the bankruptcy.


With respect to the first two exceptions to discharge, the creditor must show that (1) the debtor made the representations; (2) that at the time he or she knew were false, (3) with the purpose or intention of deceiving the creditor, (4) that the creditor relied on such representations; and (5) at a time when the debtor knew he was going to file bankruptcy. A credit card issuer justifiably relies on a representation of intent to repay as long as the account is not in default and any initial investigations into a credit report do not raise any red flags that would make reliance unjustified. While the Supreme Court has held that a creditor need not make an investigation, where the creditor disregards information that it already has, it acts at its own peril. For example, where a credit card issuer knew before it issued a Apre-approved@ credit card with an $8,000 limit, that the debtor=s income was only $640 per month, it was unreasonable to expect that someone with that little income could possibly make monthly payments to repay $8,000 at 15.5% interest. In that case, the court also awarded the debtor $3,825 in attorneys fees for prevailing in the action.


The third exception, Aluxury goods and services@, covers consumer debts owed to a single creditor for charges made, including cash advances aggregating more than $925 on an open end credit plan during the 70-day period preceding the bankruptcy filing. This provision is meant to address situations where a debtor Aloads up@ and goes on a buying spree in contemplation of bankruptcy. A debt which falls within the scope of this section is presumed to be non-dischargeable. As always there are exceptions to the general rule. One is if the debt is incurred for expenses reasonably necessary for support of the debtor and the debtor=s dependents then the presumption does not apply. Another is if the debt is not a consumer transaction, that is it is either a charge or cash advance made for a business purpose, then the presumption does not apply. Even if the debt is subject to the presumption, only the portion of the entire debt incurred within the 70-day time period is subject to this presumption. The burden of proof is then shifted to the debtor to demonstrate that the debt was not incurred in contemplation of bankruptcy.


An Aopen-end credit plan@ is defined as Aa plan under which the creditor reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed on the outstanding balance.@ Thus, while credit cards are included within the scope of this definition, an unrestricted cash loan is not. In the case of Abalance transfers@ where the balance on one credit card is transferred to another credit card and the debtor receives nothing more from the transaction, such transactions are not cash advances and are therefore not presumed to be fraudulent, and they are dischargeable.