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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).

 To rebut a presumption of fraudulent intent under 11 U.S.C. 523(a)(2)(C), the debtor must directly attack the presumed fact with sufficient evidence to support a finding that the fraudulent intent did not exist. See Wright & Graham, Federal Practice and Procedure: Evidence 5122 (1st ed. 1977). Compare In re Davis, 56 B.R. 120, 121 (Bankr. D. Mont. 1985) (debtors demonstrated a clear intention to pay by commencing payments as scheduled) Matter of Ashton, 51 B.R. 712, 713 (Bankr. W.D. Pa. 1985) (debtor failed to demonstrate a clear intention to pay because debtor knew he was insolvent when he purchased the items in question and his explanation was implausible and unsupported) and In re Koch, 83 B.R. 898, 903 (Bankr. E.D. Pa. 1988) (debtor failed to overcome the presumption because she did not introduce evidence to contest her presumed intent).

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:

 "[C]ash advances aggregating more than $875 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before [the commencement of the bankruptcy] are presumed to be nondischargeable." 11 USC 523(a)(C)(i)(II).

11 U.S.C. Section 523 includes another test: whether the credit was obtained by “false pretenses, a false representation or 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.”



In the case of In re EASHAI, Hashemi 104 F.3d 1122, 1126 (1996), the 9th Circuit cited with approval the 9th Circuit BAP's use of a "totally of the circumstances" test used in the Dougherty case.  In re Dougherty, 84 B.R. 653, 655-56 (9th Cir. BAP 1988), the 9th Circuit BAP (bankruptcy appellate panel) gave twelve (12) nonexclusive factors relevant to the debtors' intent:  

(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.


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.”

 The credit kiter makes a false representation "by creating the facade that all of his accounts are in good standing ... and ... by failing to disclose to the creditor his intent not to pay his credit card debt." Citibank v. Eashai (In re Eashai), 87 F.3d 1082, 1088 (9th Cir. 1996).

 As the court noted: "This facade gives the debtor the appearance of an honest debtor, who is servicing his credit card debt in a timely manner by making minimum payments each month" while fraudulently intending to "engage in a spending spree" at the expense of his creditors. Id.

Eashai was a case involving an elaborate credit card kiting scheme in which the card holder (debtor) made minimum monthly payments on his numerous credit cards by obtaining cash advances on other credit cards. In such a situation, the focus of the fraudulent conduct was the creation of an appearance of financial solvency and continuing monthly payment which allowed the card holder to fail to disclose that he had no intent to repay the credit card debt that he was incurring. Id. at 1088-89.  In such a case, the debtor had a duty to disclose to the card issuer that he indeed had no intention of repaying the debt even though he had created the appearance of solvency. Id. at 1089.

However, obtaining a exception from (denial of) discharge on the ground of “kiting” can be difficult.  For example, in AT&T Universal Card Services Corp. v. Dietzel (In re Dietzel) 245 B.R. 747 (Bankr. 1) Mass. 2000), the credit card issuer objected to discharge on grounds the debtor obtained cash advances by false pretenses and fraud.  The creditor bank 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 credit cards).  However, 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. Id. at 756.


To paraphrase from Hashemi, “d[o] not try "... to have a last hurrah at [the credit card bank's] expense."  104 F. 3d at 1126.


Payday Loans:

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.

Gambling Debts:

In re Kong, 239 B.R. 815 (9th Cir. B.A.P. 1999)

Even though gambler did not meet all of the Anastas factors (i.e. offer to enter into repayment plan, etc.), unreasonable belief in his ability to repay cash advances dt amount to actual fraud.  Furthermore, reckless indifference was not established.


"Fraud" Exception to Discharge Under 11 U.S.C. 523(a)(2)(A).

 To balance the fresh start afforded to honest debtors through a discharge of debts, the Bankruptcy Code excepts from discharge any debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud." 523(a)(2)(A).

 The five common law elements of actual fraud are:

 (1) the debtor made representations to the creditor;

(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).

 A creditor must prove actual fraud [that is, prove each of the five elements] by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991).

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.

Dischargeability of a Credit Card Debt.

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.

A creditor's reliance on the debtor's representation need only be justifiable, not reasonable, to except a debt from discharge under 523(a)(2)(A) of the Bankruptcy Code. Field v. Mans, 516 U.S. 59, 61 (1995).

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”).

 AT&T Universal Card Servs., Inc. v. Nguyen (In re Nguyen), 235 B.R. 76, 90-91 (Bankr. N.D. Cal. 1999) (reliance unjustifiable where card issued with $8,000 limit, knowing debtor would have $32,400 in available credit on his four cards, even though his monthly  income was only $640).

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.

"Under this theory, a court may infer the existence of the debtor's intent not to pay if the facts and circumstances of a particular case present a picture of deceptive conduct by the debtor." Id. at 1087.

 Applying the elements of fraud to the situation of a credit card debt, the Ninth Circuit developed three essential inquiries:

 (1) Did the card holder fraudulently fail to disclose his intent not to repay the credit card debt;

 (2) did the card issuer justifiably rely on a representation by the debtor; and

 (3) was the debt sought to be discharged proximately caused by the first two elements. Anastas v. Am. Sav. Bank (In re Anastas), 94 F.3d 1280, 1284 (9th Cir. 1996) (citing In re Eashai, 87 F.3d at 1088).

 In In re Anastas, the Ninth Circuit clarified that financial condition, standing alone, is not a substitute for an actual finding that the debtor intended to deceive the creditor when the charges were incurred. 94 F.3d at 1286. For this reason, the Court explained in Anastas that a trial court must not singularly focus on the debtor's ability to repay the debts, but on whether the debtor incurred the debts with an intent not to repay. Id. at 1285.

 The Anastas court further clarified that the "intent not to repay" inquiry must generally be applied to each individual charge made to the credit card. Id.

 The court viewed each individual credit transaction as the formation of an unilateral contract in which the card holder promises to repay the debt plus accrued finance charges and the card issuer performs by reimbursing the merchant who accepted the credit card in payment. Id.

 In many credit card cases, the inquiry is not whether the card holder lacked an intent to repay all of the charges made on the card because of a fraudulent financial scheme, but rather whether the card holder lacked an intent to repay when making certain individual charges because he planned to shortly discharge them in bankruptcy. This behavior is commonly referred to as "loading up." Id. (emphasis in original).

”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).

The Ninth 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. 4 ("reckless 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 such extreme departure from the standards of ordinary care that it presents a danger of misleading [those whom rely on the truth of the representation]." 69 A AM.JUR.2d Securities Regulation--Federal 1284 (1993). Fraudulent misrepresentation is established where the maker of a statement chooses to assert it as a fact even though he is conscious that he has neither knowledge nor 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 saying that fraud is proved if it is shown that a false representation has been made without belief in its truth or recklessly, careless of whether it is true or false." Id. See also Houtman, 568 F.2d at 656 (" '[R]eckless indifference to the actual facts, without examining the available source of knowledge which lay at hand, and with no reasonable ground to believe that it was in fact correct' [is] sufficient to establish the knowledge element ... which completely bar[s] a discharge of all debts if the bankrupt made a materially false statement in order to obtain property on credit.") (quoting Morimura, Arai & Co. v. Taback, 279 U.S. 24, 33, 49 S.Ct. 212, 73 L.Ed. 586 (1929)).

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.

"A finding that a debt is nondischargeable under 523(a)(2)(A) requires a showing of actual or positive fraud, not merely fraud implied by law." Anastas, 94 F.3d at 1286 (citing Public Fin. Corp. of Redlands v. Taylor (In re Taylor), 514 F.2d 1370, 1373 (9th Cir.1975)).

The requirements of 523(a)(2)(A) mirror the common law elements of fraud. See Field v. Mans, 516 U.S. 59, 69 (1995).

"[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).

"Just as a debtor's testimony about his subjective intent is not by itself legally dispositive, neither are the objective inferences drawn from consideration of the Dougherty factors. Because fraud lurks in the shadows, it must usually be brought to light by consideration of circumstantial evidence." Ettell, 188 F.3d 1141. Thus, in the Ninth Circuit, "the debtor's subjective intent must be evaluated in light of objective factors." Id. n. 3. "Because no single objective factor is dispositive, assessment of intent is thus left to the fact-finder." Id. Again, the Dougherty factors are not the exclusive means of ascertaining fraudulent intent and do not "handcuff the trier of fact, who is in the best position to balance the objective evidence against the witness's testimony and credibility." Id.

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)).

The Ninth Circuit advises that "[c]are must be taken to stop short of a rule that would make every desperate, financially strapped debtor a guarantor of his ability to repay, on pain of nondischargeability. Such a rule would unduly expand the "actual fraud" discharge exception by attenuating the intent requirement. A substantial number of bankruptcy debtors incur debts with hopes of repaying them that could be considered unrealistic in hindsight. This 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, people may engage in the practice of using cash advances to solve their short-term cash flow problems or to deal with sporadic and seasonal income. See Citibank (N.Y. State) v. Davis (In re Davis), 176 B.R. 118 (Bankr.W.D.N.Y.1994). Moreover, we recognize the fragility of human nature. "[H]uman experience tells us debtors can be unreasonably optimistic despite their financial circumstances." In re Cox, 182 B.R. 626, 635 (Bankr.D.Mass.1995)....

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.

Related Article: Fraud and Misrepresentation Law in California 

Disclaimer: The information provided in this article is informational, only. The subject matter and applicable law is evolving and/or constant state of change. No legal advice is given and no attorney/client or other relationship is established or intended.  The information provided is from general sources, and I cannot and do not represent, guarantee or warrant that the information contained in this website is accurate, current, or is appropriate for the usage of any reader. It is strongly recommended that readers of this information consult with their own lawyer and/or professional counsel rather than relying on any information in this article. To determine whether or not and how the above bankruptcy laws apply to your particular situation, you are urged to seek counsel from an experienced and knowledgeable bankruptcy attorney.

Further, this article is primarily focused on the law of the Ninth Federal Circuit.  It may or may not be contain accurate information related to the federal circuits in your area or region.

Copyright 2012

Article's Author: Christian Bankruptcy lawyer Matthew B. Tozer

Under the new bankruptcy laws, Mr. Tozer is a debt relief agency because he helps people file for bankruptcy relief under the Bankruptcy Code.

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