Chapter 7 Credit Card Debt
The Bankruptcy Code forgives many honest financial mistakes. However, it also provides creditor remedies for debts that may be less than honest. The Bankruptcy Code allows a creditor to object to the discharge of a credit card debt when there is evidence that the debtor has committed fraud.
A bank objecting to the discharge of a credit card debt on the basis of fraud will file an adversary case against the debtor. The fraud claim is usually one of two types: (1) fraud in obtaining the credit; or (2) fraud in incurring the credit.
A bank may claim that the debtor committed fraud in obtaining the credit card. If the creditor can prove that the card was obtained under false pretenses (i.e. that the application was false), the credit card debt may be declared non-dischargeable because of the fraud. False pretenses may include many things, but is usually lying about financial stability or income.
The bank may claim that a charge was made when the debtor was unable to repay, and had no intention to repay the debt. Because proving this may be difficult for the creditor, the bankruptcy law presumes that a charge is fraudulent if luxury goods are purchased, or a cash advance is taken, shortly before the bankruptcy case is filed. It is then up to the debtor to prove that the charge is not fraudulent or the charge is not included in the bankruptcy discharge.
Banks routinely check the bankruptcy debtor’s account for signs of fraud. Some red flag actions include:
• Filing bankruptcy on a new card;
• Taking a cash advance prior to filing;
• Charges for travel or vacation;
• A debt transfer from one card to another;
• Credit charges while unemployed; and
• Charges made after consulting a bankruptcy attorney.
The more time between the credit card activity and the bankruptcy filing, the less likely the charge will cause a discharge dispute. The best advice is: if you are considering bankruptcy, stop using your credit cards. Consult with your bankruptcy attorney regarding the best way to discharge your credit card debt.