CREDIT CARD DEBT

Evaluating credit card discharge issues

Credit card issuers sometimes challenge the discharge of their debt in bankruptcy by filing an Adversary proceeding claiming that the debt was incurred by fraud and therefore should be excluded from bankruptcy discharge. This is sometimes called a "non-dischargeability action".

Credit card debt may be non dischargeable in bankruptcy under either of two legal theories:

The application submitted to get the card was fraudulent
The card was used without an intent to repay; this is far more common

This issue used to arise only in Chapter 7 prior to the 2005 bankruptcy code amendments. Now, creditors can contest the discharge of debts in a 13 as well based on a claim of fraud.

Hot buttons for card issuers

While each card issuer has a different practice about non dischargeability actions, each of the following circumstances probably increase the likelihood that the debt may be subject to challenge by the creditor:

Increase in credit card usage shortly before filing
Newly issued card
Large cash advances in months before filing
Use of card for recent travel or vacations
Pattern of borrowing on one card to make payments on others
Exceeding credit limit
Using card when unemployed or without reasonable belief that the debt can be repaid
Large balance at filing
Charges made after consulting bankruptcy lawyer.

Any charges to credit cards made after you have consulted with a bankruptcy attorney are likely to be challenged by the creditor, so we recommend that you stop using your charge cards as soon as you decide to file bankruptcy. Once you have decided to file bankruptcy, you can hardly have an intention to repay the credit card charges; using a card knowing you don't intend to repay is fraud.

Also, cash advances over $1075 obtained within 60 days of the bankruptcy or purchases of luxury goods within 60 days of bankruptcy are presumed by the courts to be non dischargeable.

Generally, the longer the length of time between any particular use and the bankruptcy filing, the less likely the usage will trigger a challenge to dischargeability. A complaint for dischargeability based on fraudulent use of the card may seek non dischargeability for certain of the charges, not necessarily the entire balance.

What options are available

If you are concerned about a challenge by a credit card issuer to the discharge of a particular debt, there are several strategies available:

Wait to file bankruptcy so as to put more time and/or more payments on the account between the questionable usage and filing bankruptcy.
Settle with any objecting creditor if and when they file a non dischargeability action
Contest the suit at trial: if you win, you may recover your attorney's fees incurred to defend the action.