Most credit card debt can be discharged (forgiven, wiped out) in bankruptcy. But if a credit card lender can prove they were defrauded, the debtor can lose the right to discharge that particular credit card debt.
Fraud is incurring the charge without the intention to repay. Also, in some courts, another form of fraud is incurring a debt that you know you can’t repay.
Thus, for example, if you incurred a debt, but had no intention to repay the debt, then such debt was fraudulently incurred. If such fraud proved, the debt is not dischargeable in bankruptcy.
But most people don’t intentionally charge up a credit card without intending to eventually repay the debt.
A common "red flag” or “badge” for fraud occurs when a person makes significant credit card charges close in time to the bankruptcy filing. Worse is when the charges occur after first consulting with a bankruptcy attorney.
The higher the amount and the more recent the transaction, the more likely that one is going to have a creditor allege fraud.
After you file your bankruptcy petition, a creditor may challenge a debt’s dischargeability of the debt owed to the creditor. The creditor starts the challenge by filing an adversary action in the bankruptcy court against the bankruptcy filing debtor.
Unfortunately, innocent debtors are sometimes improperly “accused” of fraud. But there are specific strategies that can be employed by innocent debtors to help minimize the likelihood of having to participate in dischargeability litigation. An experienced bankruptcy lawyer can advise you in this regard.
PRESUMPTION OF FRAUD [11 USC Section 523(a)(2)]:
Non-essential credit card charges on one credit card totaling $600 or more within 90 days of filing the bankruptcy petition are “presumed” to be non-dischargeable.
Non-essential means “consumer debts” for “luxury goods and services.”
“Consumer debts are debts incurred for personal, family, or household purposes", i.e., not business debts, not tax debts.
“Luxury goods or services” do not include goods or services reasonably necessary for support or maintenance.
This “presumption” of fraud can be potentially rebutted (refuted) by evidence that there was no fraudulent intent.
"[C]onsumer debts owed to a single creditor and aggregating more than $600 for luxury goods or services incurred by an individual debtor on or within 90 days before [the commencement of the bankruptcy] are presumed to be nondischargeable." 11 USC § 523(a)(C)(i)(I).
Further, cash advances aggregating $875 within 70 days of filing the bankruptcy petition are presumed non-dischargeable.
Normally, the fraud accuser must prove (has the burden to prove) that you committed fraud. But, if the presumption applies, you must prove (you have the burden to prove) that you did NOT commit fraud.
Thus, cash advances made to a credit card may also be declared nondischargeable by rebuttable presumption:
11 U.S.C. Section 523 includes another test: whether the credit was obtained by “false pretenses, a false representation or actual fraud.”
FIVE ELEMENTS MUST BE PROVED BY THE ACCUSING CREDITOR TO ESTABLISH NONDISCHARGEABILITY DUE TO ACTUAL FRAUD:
In re Slyman, 234 F.3d 1081 (9th Cir. 2000):
“The five elements, each of which the creditor must prove by a preponderance of the evidence, are:
(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor;
(2) knowledge of the falsity or deceptiveness of his statement or conduct;
(3) an intent to deceive;
(4) justifiable reliance by the creditor on the debtor's statement or conduct; and
(5) damage to the creditor proximately caused by it's reliance on the debtor's statement or conduct.”
12 FACTORS THAT THE COURT USES TO DETERMINE IF FRAUD OCCURRED:
(1) The length of time between the charges and the bankruptcy filing;
(2) Whether or
not an attorney had been consulted
concerning the filing of
bankruptcy before the charges were made;
(3) The number of charges made;
(4) The amount of the charges;
(5) The financial condition of the debtor at the time the charges were made;
(6) Whether the charges were above the credit limit of the account;
(7) Whether the debtor made multiple charges on the same day;
(8) Whether or not the debtor was employed;
(9) The debtor's prospects for employment;
(10) The financial sophistication of the debtor;
(11) Whether there was a sudden change in the debtor's buying habits; and
(12) Whether the purchases made were luxuries or necessities.
PRACTICAL DISCUSSION OF WHAT FACTS MAY SUGGEST FRAUD:
Two ways that you can lose the discharge on a credit card debt are:
1. Lie on the credit application (misstate income, assets, and/or employment status so as to appear more worthy of obtaining credit). This type of challenge is probably unlikely, but is more likely the closer in time to filing bankruptcy that the application was submitted and the more egregious the fabrications are.
2. Use the card fraudulently. The law presumes when one uses a credit card, that one intends to pay back the creditor bank. To rebut the presumption and prove the fraud, the credit card issuer banks seek to infer fraud through circumstantial evidence, for example:
a. Running up account balance shortly before bankruptcy filing, that is, an increase in charging activity closer to filing (“Loading Up”);
b. Making larger than usual charges;
c. Large cash advances;
d. Buying non-essential products or items (e.g., discretionary purchases or travel);
c. No payments after making significant purchases or cash advances;
d. Charging more than the credit limits; and/or
e. Using the card just before filing bankruptcy.
These items above, either individually or a combination of the above, “suggest” fraud to the creditor.
And remember, just because any or a combination of the circumstances above are in place, does not necessary mean that you committed fraud. But they can send up “red flags” to creditor banks.
If you have circumstances like or analogous to any of the above, seek consultation from an experienced bankruptcy attorney who can advise you what might be done to mitigate or repair the situation.
A measure of prudent care regarding pre-bankruptcy filing usage and payment of credit card charges can significantly reduce the likelihood of a challenge to the dischargeability of a portion of a credit card balance.
If you are contemplating bankruptcy, the general rule is: Stop the using credit cards! If you do use the card, use it only for essential needs, and, whatever amount you charge, pay at least the same amount back immediately when you receive the billing statement.
In short, if you are considering filing bankruptcy, your credit cards usage can be evaluated for fraud in your bankruptcy case.
Do not participate in credit card kiting. Kiting is where you take out cash advances or use a credit card to pay the minimum balances on your other credit cards, while, at the same time, you continue to use those other credit cards.
Some refer to this practice as “robbing from Peter to pay Paul.”
Eashai was a
case involving an elaborate credit card kiting scheme in which the card
made minimum monthly payments on his numerous credit cards by obtaining
advances on other credit cards. In such a situation, the focus of the
fraudulent conduct was the creation of an appearance of financial
continuing monthly payment which allowed the card holder to fail to
that he had no intent to repay the credit card debt that he was
obtaining a exception from (denial of) discharge on the ground of
be difficult. For
example, in AT&T Universal Card Services Corp. v.
Dietzel (In re
(Bankr. 1) Mass. 2000), the credit card
objected to discharge on grounds the debtor obtained cash advances by
pretenses and fraud. The
alleged that the debtor did not have a present intent to repay the
debts. The debtor
engaged in credit card kiting (that
is, debtor used credit card cash advances to make payments on other
the debtor did not
consult with a bankruptcy lawyer until later. Furthermore,
the debtor was employed at the time
that the cash advances
were made. The court concluded that the creditor did not
meet its burden of proving by the preponderance of evidence
that there was no intent to repay.
paraphrase from Hashemi, “d[o] not try "... to have
a last hurrah
at [the credit card bank's] expense." 104
F. 3d at 1126.
In re McGee, 359 B.R. 764, 771 (9th Cir. BAP 2006)
In this case, the bankruptcy court denied a default judgment for a payday lender on its dischargeability complaint, where the court found at the default prove-up hearing that justifiable reliance was a material fact at issue, given the pay day loan’s 190.37% annual interest rate.
In re Kong, 239 B.R. 815 (9th Cir. B.A.P. 1999)
"Fraud" Exception to Discharge Under 11 U.S.C. § 523(a)(2)(A).
(2) the debtor knew the representations were false at the time they were made;
(3) the debtor made the representations with the intention and purpose of deceiving the creditor;
(4) the creditor relied on the representations; and
(5) the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.
Citibank v. Eashai (In re Eashai), 87 F.3d 1082, 1086 (9th Cir. 1996).
Preponderance of the evidence means the greater weight (51%, majority) of the evidence is needed for the creditor to prove the element. This preponderance is based on the more convincing evidence and its probable truth or accuracy, and not necessarily on the amount of evidence.
But, if transactions fall within the presumption periods and amounts and types of debt described above in this internet article, the borrower / debtor must rebut (disprove) that the transaction(s) were fraudulent.
When the debt at issue arises from the use of a credit card, the first, fourth and fifth elements of the fraud claim are generally straightforward. Courts accept the premise that the debtor's use of a credit card constitutes a representation to the creditor of the debtor's intent to repay the debt. See In re Eashai, 87 F.3d at 1087.
reliance on the debtor's representation need
only be justifiable, not reasonable, to except a debt from discharge
523(a)(2)(A) of the Bankruptcy Code. Field v. Mans, 516
Unless the debtor's credit card history is marked by "red flags," the creditor can establish reliance on the debtor's promise to pay the debt by simply showing that the debtor paid his or her credit card debts in the past. See In re Eashai, 87 F.3d at 1091.
If the credit card issuer discovers “red flags” during a preissuance investigation or during the lending relationship, such as unemployment or insufficient income to service existing debt, it probably would not be justified in relying on a representation of intent to pay. See Chevy Chase Bank, FSB v. Briese (In re Briese), 196 B.R. 440, at 454 (reliance unjustified where issuer’s investigation revealed “high debt load and an inability to make more than minimum payments”; issuer thus “ignored an obvious risk in extending credit”).
The finding of damages is supported by the fact that the debt was not repaid and subject to potential discharge in the bankruptcy proceeding.
In a "credit card" dischargeability case, the issues shift away from the actual representation and focus more on the debtor's state of mind: knowledge that the representation was false and intent to defraud. With respect to credit card debt, the Ninth Circuit Bankruptcy Appellate Panel has noted:
Where purchases are made through the use of a credit card with no intention at that time to repay the debt, that debt must be held to be nondischargeable pursuant to section 523(a)(2)(A). To hold otherwise would be to ignore the plain language of the statute and to reward dishonest debtors.
Citibank v. Dougherty (In re Dougherty), 84 B.R. 653, 657 (9th Cir. BAP 1988):
In In re Dougherty, the Court adopted a nonexclusive list of twelve objective factors that "trial courts should consider" to determine the debtor's intent.3 84 B.R. at 657 (citation omitted).
Since then, the Ninth Circuit has adopted the Dougherty approach for determining if the debtor used his or her credit card with a subjective intent to deceive. "Since a debtor will rarely admit to his fraudulent intentions, the creditor must rely on the twelve factors of Dougherty to establish the subjective intent of the debtor through circumstantial evidence." In re Eashai, 87 F.3d at 1090.
THE 12 FACTORS are listed and identified earlier in this article.
The twelve Dougherty factors do not "provide the exclusive means of assaying fraudulent intent." Household Credit Serv. v. Ettell (In re Ettell), 188 F.3d 1141 (9th Cir.1999) (citing Anastas, 94 F.3d at 1284-85). Therefore, a precise analysis of the Dougherty factors, although useful, is not a requisite to determining whether a debtor has fraudulently represented his intent to repay a credit card debt.
The focus should not be on whether the debtor was hopelessly insolvent at the time he made the credit card charges. Rather, the express focus must be solely on whether the debtor maliciously and in bad faith incurred credit card debt with the intention of petitioning for bankruptcy and avoiding the debt.
The Ninth Circuit has described the Dougherty approach as a "totality of the circumstances" theory.
theory, a court
may infer the existence of the debtor's intent not to pay if the facts
circumstances of a particular case present a picture of deceptive
”Reckless disregard” for the truth regarding the intent to repay a debt satisfies the "intentional misrepresentation" element of the fraud claim. In re Anastas, 94 F.3d at 1286 (citation omitted).
Circuit uses the phrase "reckless
indifference to his actual circumstances" interchangeably with
"reckless disregard for the truth of a representation." Anastas,
94 F.3d at 1286; see also Ettell, 188 F.3d 1141 n.
conduct could be sufficient to establish fraudulent intent") (citing Anastas,
94 F.3d at 1286); Arm v. A. Lindsay Morrison, M.D., Inc. (In
re Arm ),
175 B.R. 349, 354 (9th Cir. BAP 1994), aff'd, 87 F.3d 1046, 1049 (9th
Cir.1996); Bear Stearns, 30 B.R. at 502.
"[R]eckless conduct must
involve more than simple, or even inexcusable negligence; it requires
extreme departure from the standards of ordinary care that it presents
of misleading [those whom rely on the truth of the representation]." 69
AM.JUR.2d Securities Regulation--Federal § 1284 (1993). Fraudulent
misrepresentation is established where the maker of a statement chooses
it as a fact even though he is conscious that he has neither knowledge
belief in its existence "and recognizes that there is a chance, more or
less great, that the fact may not be as it is represented." Restatement
(Second) of Torts § 526, cmt. e. "This is often expressed by
that fraud is proved if it is shown that a false representation has
without belief in its truth or recklessly, careless of whether it is
However, Anastas advises us that "in applying the concept of reckless disregard for the truth of a representation in the case of credit card debt, we must be careful to keep in mind that the representation being made by the card holder is solely as to intent to repay, not as to the debtor's ability to repay." Anastas, 94 F.3d at 1286. Reckless disregard should be very narrowly construed. See Kukuk, 225 B.R. at 787.
[C]ourts faced with the issue of dischargeability of credit card debt must take care to avoid forming the inquiry under section 523(a)(2)(A) as whether the debtor recklessly represented his financial condition. The correct inquiry is whether the debtor either intentionally or with recklessness as to its truth or falsity, made the representation that he intended to repay the debt. Anastas, 94 F.3d at 1286.
finding that a debt is nondischargeable under § 523(a)(2)(A) requires a
of actual or positive fraud, not merely fraud implied by law." Anastas,
94 F.3d at 1286 (citing Public Fin. Corp. of
requirements of § 523(a)(2)(A) mirror the common law elements of fraud.
v. Mans, 516
"[E]ach time a 'card holder uses his credit card, he makes a representation that he intends to repay ...[.] When the card holder uses the card without an intent to repay, he has made a fraudulent representation to the card issuer.' " Hashemi, 104 F.3d at 1126 (quoting Anastas, 94 F.3d at 1285).
11 U.S.C. Section 523(a)(2)(A) provides in pertinent part:
§ 523. Exceptions to discharge.
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt--
* * *
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.
The existence of fraud is examined on a case-by-case basis. See Ettell, 188 F.3d 1141 (recognizing that the Ninth Circuit applies a totality of the circumstances test in determining the existence of actual fraud); In re Carolan, 204 B.R. 980, 985-86 (9th Cir. BAP 1996).
as a debtor's testimony about his subjective intent is not by itself
dispositive, neither are the objective inferences drawn from
the Dougherty factors. Because fraud lurks in the shadows, it must
brought to light by consideration of circumstantial evidence." Ettell,
188 F.3d 1141. Thus, in the Ninth Circuit, "the debtor's subjective
must be evaluated in light of objective factors."
Eashai, 87 F.3d at 1090 (recognizing that a debtor's unreasonably optimistic view that he could repay the debt when it was incurred does not constitute fraud if the debtor intended to repay the debt when it was incurred); Chevy Chase Bank FSB v. Kukuk (In re Kukuk), 225 B.R. 778, 787- 88 (10th Cir. BAP 1998) (concluding that "a misrepresentation is fraudulent only if the maker 'knows or believes that the matter is not what he represents it to be' ") (quoting RESTATEMENT (SECOND) OF TORTS § 526(a)).
Ninth Circuit advises that "[c]are must be taken to stop short of a
that would make every desperate, financially strapped debtor a
guarantor of his
ability to repay, on pain of nondischargeability. Such a rule would
expand the "actual fraud" discharge exception by attenuating the
intent requirement. A substantial number of bankruptcy debtors incur
hopes of repaying them that could be considered unrealistic in
by itself does not constitute fraudulent conduct warranting
nondischarge." [Karelin v. Bank of American Nat'l Trust & Sav.
Ass'n (In re Karelin), 109
B.R. 943, 947- 48 (9th Cir. BAP 1990) ]. In hard financial times,
engage in the practice of using cash advances to solve their short-term
flow problems or to deal with sporadic and seasonal income. See Citibank
Eashai, 87 F.3d at 1090.
Section 523(a)(2) expressly prohibits using a non-written representation of a debtor's financial condition as a basis for fraud. See Anastas, 94 F.3d at 1285.
Article's Author: Christian Bankruptcy lawyer Matthew B. Tozer
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