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Defeating Creditors’ Accusations That You Misused Their Credit to Pay for the Holidays

Posted by Kevin on April 7, 2014 under Bankruptcy Blog | Comments are off for this article

The risk that creditors will not allow you to discharge some of their debts can be minimized through smart timing of your bankruptcy.

One of the most basic principles of bankruptcy is that honest debtors get relief from their debts, dishonest ones don’t. One way you can be “dishonest” in the eyes of the bankruptcy law is to use credit when, at that point in time, you don’t intend to pay it back. That makes sense. Each time you sign a promissory note or use a credit card you are directly stating in writing, or else strongly implying, that you promise to pay the debt you are then creating. That makes moral common sense. And it’s the law: a creditor can challenge your ability to write off a debt that you did not intend to pay when you incurred it.

Creditors Have the Burden of Showing Dishonest Intent

But most of the time when a person takes out a loan or uses a credit card, they DO intend to pay the debt. The law respects that reality by holding that most debts are discharged (legally written off) unless the creditor can prove to the court that the debtor had bad intentions when incurring the debt. So, for example, if a person completes a credit application with inaccurate information, for the creditor to successfully challenge the discharge of that debt it would not only have to show this inaccuracy was “materially false,” but also that the person provided that information “with intent to deceive” the creditor. See Section 523(a)(2)(B) of the Bankruptcy Code.

Dishonest Intent Inferred from When You Incurred the Debt

However, in the delicate balancing act between the rights of debtors and creditors, the law also recognizes that it’s quite hard to prove an “intent to deceive.” So the Bankruptcy Code gives creditors a significant, although limited, advantage when consumer purchases or cash advances are made within a short period of time before the bankruptcy filing. A debtor’s use of consumer credit during that period is presumed to have been done with the intent not to pay the debt, on the theory that the person likely was considering filing bankruptcy at the time, and likely wasn’t planning on paying back that new bit of debt. So the statute says that this new portion of the debt is “presumed to be nondischargeable.”

Limitations on the “Presumption of Fraud”

This presumption is limited in lots of ways:

  • Applies only to consumer debt, not debts incurred for business purposes.
  • Covers only two narrow situations:
    • 1) cash advances totaling more than $750 from a single creditor made within 70 days before filing bankruptcy;
    • 2) purchases totaling more than $500 from a single creditor made within 90 days before filing bankruptcy, IF those purchases were for “luxury goods or services,” defined rather broadly as anything not “reasonably necessary for the support or maintenance of the debtor or a dependent.”
  • The debtor can override the presumption by convincing the court—by personal testimony and/or other facts—that he or she DID, at the time, intend to pay the debt.

So there is no presumption of fraud, and no presumption of nondischargeability of the debt, if cash advances from any one creditor add up to $750 or less within the 70-day period, or if credit purchases for non-necessities from any one creditor add up to $500 or less within the 90 days. See Section 523(a)(2)(C). This means that one simple way to avoid the presumption is to wait until enough time has passed before filing bankruptcy so that you get beyond these 70- and 90-day periods. That is, this is easy unless you have some urgent need to file the case.  Either way, your attorney will help determine when you should file your case.

Possible Creditor Challenge Even Outside the Presumption

With all this focus on the presumption, be sure to understand that even if your use of credit doesn’t fit within the narrow conditions for the “presumption of nondischargeability,” a creditor could still believe that the facts show that you did not intend to repay a debt, or that you incurred the debt dishonestly in some way. However, these kinds of challenges are relatively rare because:

  • As stated above, the creditor has the burden of proof, and it’s not easy for it to prove your bad intention;
  • The creditor can spend a lot of money on its attorney fees to make the challenge, with a big risk that the debts will just be discharged anyway; and
  • The creditor may also be required to pay YOUR attorney fees in defending the challenge if it loses. See Section 523(d).

Are Creditors Going to Challenge the Discharge of Debts in My Bankruptcy Case?

Posted by Kevin on June 13, 2012 under Bankruptcy Blog | Be the First to Comment

Every creditor has the right to challenge your ability to write off your debts in bankruptcy. But none of them likely will. Why not?

For most people filing bankruptcy, every debt they intend to discharge (write off) will in fact be discharged.

There are two categories of debts that are not discharged in bankruptcy. The first category includes those special ones that Congress has decided for policy reasons simply should not be subject to a bankruptcy discharge. Among the most common ones are spousal and child support, most student loans, and many tax obligations. Assuming you are represented by a competent bankruptcy attorney, you will know before your case is filed if any of your debts fall into this category.

The second category of debts includes those that are discharged UNLESS the creditor files a formal objection to the discharge. Any creditor can raise an objection. But creditors very seldom do, for these reasons:

1. Although any creditor can challenge your discharge of its debt, it can only win such a challenge if it can prove that you acted inappropriately in certain very specific ways.  Proving inappropriate action is not easy and it can be costly.   Many creditors first impulse is that they will fight the discharge.  Then after they sit down with a lawyer and find out what it is going to cost and what the chances of success are, a vast majority of creditors are sensible enough to not throw the proverbial good money after bad chasing a hopeless cause.

2. On top of that, bankruptcy law discourages creditors from raising challenges in two ways:

a. Debts are presumed to be dischargeable—at least if they do not fit any of the special nondischargeable debts in the first category referred to above. So the creditor has the burden of proving that the debt is not dischargeable, and the debt is discharged if it fails to provide the necessary evidence to meet that burden.

b. The creditor risks being ordered to pay YOUR costs and attorney fees for defending a challenge if you defeat the challenge. This is an added disincentive for a creditor to push a challenge when it has weak facts against you.

However, there are two situations where a debtor may get challenged on her discharge:

1.  In cases involving use of credit card for luxury purchases within 90 days of filing or obtaining cash advances within 70 days of filing, there is a presumption that the debtor is trying to defraud the creditor.  Since this presumption makes it easier to prove the case, creditors will bring this type of action.

2.  Also, you may have a creditor who is motivated less by economic good sense than by a desire to cause you trouble, say an ex-spouse or former business partner.

The best way to deal with these situations is, first, to be completely honest with your attorney in answering every question he or she asks you, whether during a meeting or when providing information in writing. Be thorough in your responses. And second, if you have ANY concerns along these lines, make a point of voicing your concerns, and do so early in the process. Particularly, if you wonder whether you’ve acted inappropriately with any of your creditors; or if you have any personal creditors who are carrying a grudge, discuss it with your attorney. It may be that your concerns are unfounded and that would be a relief.  However, if your concerns are real, then it is better to prepare for opposition ahead of time.

Debts for Recent “Luxury Goods or Services” and Cash Advances

Posted by Kevin on June 6, 2012 under Bankruptcy Blog | Be the First to Comment

“Presumption” that certain recent credit card purchases and cash advances will not be discharged in bankruptcy

Some types of debts  get written-off (“discharged”) in bankruptcy.  Others do not.  Included in the  list of those that might NOT be discharged are those “incurred through fraud or misrepresentation, including recent cash advances and ‘luxury’ purchases.” Today’s blog focuses on these types of debts.  In fact, this blog just looks at one particular subcategory of these debts—those that the Bankruptcy Code says “are presumed to be nondischargeable.” What is this “presumption,” how does it work, and what should you do about it?

The Fraud/Misrepresentation Exception to Discharge

First of all, the idea behind this exception to discharge is that debtor who cheats the creditor to borrow the money or get the credit should not be able to discharge that debt in bankruptcy. That follows one of the most basic principles of bankruptcy, that is, the purpose of bankruptcy is to give a fresh start to an honest debtor.

The Point of a “Presumption”

Debts which potentially belong to this fraud/misrepresentation category of debts ARE discharged UNLESS the creditor formally objects to the discharge of the debt within a rather quick deadline, usually 60 days after your meeting with the bankruptcy trustee. That objection would be in the form of a lawsuit the creditor files at the bankruptcy court. In that lawsuit the creditor lays out the facts of fraud or misrepresentation that would justify the debt not being discharged.  The creditor would then need to prove those facts with evidence. The debt is still discharged unless the creditor present evidence that leads the bankruptcy judge to decide that the debt was in fact obtained by the debtor’s fraud or misrepresentation.

A presumption in the bankruptcy law that a debt is not dischargeable simply makes it much easier for the creditor to prove that point. The creditor simply needs to establish that those circumstances apply to the challenged debt. Then that debt is “presumed” not to be discharged. And it will not be discharged unless the debtor can bring contrary evidence showing the lack of fraud or misrepresentation by him or her. In terms that may be familiar, a presumption “shifts the burden of proof” from the creditor to the debtor.

Why is this important? Litigation is expensive. Most cases are settled before going to trial because the amounts at issue are not worth the costs of battling it out in court. Congress has decided in two sets of  circumstances to tip the advantage in favor of the creditors, by giving them the presumption of no discharge.

The “Luxury Goods or Services” Presumption

The first of these circumstances arises if a consumer incurs a debt of more than $500 in “luxury goods or services” in the 90 days before filing the bankruptcy. That debt is presumed not to be dischargeable, meaning that the creditor doesn’t need to bring evidence establishing that the debtor intended to cheat the creditor by not paying the debt. The thought behind this is that either the person making the purchase knew he or she was going to file bankruptcy and was not going to pay the debt, or else at least was quite reckless to be using creditor that close to filing bankruptcy.

So what are “luxury goods or services”? Broader than it sounds. They include anything except those “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” The court decides what fits that definition. It’s up to the debtor to persuade the court that the goods and/or services totaling more than $500 were “reasonably necessary,” or that the debt was incurred with the honest intention, at that time, of paying it.

The Cash Advances Presumption

The second of these circumstances arises if a consumer incurs a debt of more than $750 through a cash advance or advances made in the 70 days before filing the bankruptcy. In the same way as with the “luxury goods” presumption, the creditor does not need to bring evidence establishing that the debtor did not intend to pay the debt. And in the same way, the debtor can try to persuade the court that the cash advance was incurred with the intention of paying it.

Debts for Luxury Goods or Cash Advances Outside the Presumption Period

In these situations the presumption would not apply. So the creditor would have to show the court convincing evidence that you did not intend to pay the debt. Since that is often not easy to show, creditors are not as likely to challenge purchases and cash advances that were made before the presumption period.

Avoiding These Presumptions

Avoid these presumptions by not using any credit and making cash advances in the few months before filing bankruptcy. If you did makes such purchases before the expiration of the presumption periods, you can hold off on your filing until the presumption periods have ended.  Allowable but not 100% foolproof.  It just put a tougher burden on the creditor.