Last week, I wrote about 8 debts that a bankruptcy debtor may have that are not discharged, even if the bankruptcy client receives a “general” discharge. The kind of debts I wrote about - child support, most taxes, student loans, to name a few - are debts that are never discharged in a bankruptcy case.
People who file a bankruptcy with the types of debts that are never discharged must bring a lawsuit against the creditor in bankruptcy court if they feel, for some reason, that the debt in question should be discharged, despite its characterization. It’s up to the debtor to do this; if the debtor does nothing to contest the non-dischargeability of the debt, the bankruptcy debtor remains liable for the debt after discharge.
But there are other debts that may not be discharged in a bankruptcy case that don’t fall into this “never discharged” category. For these debts, the creditor is the party that must bring the action in bankruptcy court to determine whether the debt can be discharged. There are several categories of debts that fall into this “might not be” discharged category. Let’s take a look at them:
Luxury Purchases on a Credit Card
Purchases of “luxury goods or services” owed to a single creditor and aggregating more than $675 made within 90 days of a bankruptcy case being filed are presumed to be non-dischargeable in the bankruptcy case. The Bankruptcy Code specifically limits the definition of “luxury” by stating that goods and services purchased by the debtor reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor are not luxury purchases.
Be aware that the presumption that the luxury charge is not discharged isn’t the same as a debt that is “never” discharged. The presumption means that if there is a trial to determine whether a bankruptcy debtor’s charges were luxury purchases or not, if the charges in question were made less than 90 days before the bankruptcy case was filed, the debtor has the burden of proving that it is more likely than not that the purchases were not for luxury goods or services. So while this debt is not automatically not discharged, the debtor has to prove that the debt can be discharged, the creditor does not have to prove that the purchases were of the forbidden “luxury” nature.
Another defense to the luxury purchase exception to discharge is that the bankruptcy debtor intended to repay the debt. That is, at the time the purchase was made, the debtor had the intention and the ability to repay the charges according to the terms of the credit card agreement. In cases where this defense is successful, the debtor needs to show some intervening event between the purchase and the time the bankruptcy case was filed that made it impossible for the debtor to repay the charge.
If luxury charges are made on a card in excess of $675, but the charges were made more than 90 days prior to filing, the bankruptcy debtor may still face a lawsuit by the creditor seeking to have the debt excepted and removed from the bankruptcy debtor’s general discharge. But in a case like this, the burden of proving that the charges were for luxury goods and that the debtor did not intend to repay the charge falls on the creditor - the debtor doesn’t have to prove the charges weren’t for luxury items; the creditor has to prove they were.
Cash Advances on a Credit Card
Cash advances made by a debtor on a credit card within 70 days prior to the debtor filing a bankruptcy case, which advances total $975 or more are presumed to be non-dischargeable. Similar to luxury purchases, this exception to discharge shifts the burden of proof between the debtor and the creditor depending on how many days prior to the debtor filing a bankruptcy case the cash advance was made: if the advance (or cumulative advances) total $975 or more within 70 days prior to filing, then the debtor has to show either that he or she did not take the advance (difficult) or that the debtor intended to repay the advance, and subsequent events made repayment impossible.
If the advances were taken more than 70 days prior to the case being filed, then if a creditor chooses to bring a lawsuit against the debtor to determine that the debt cannot be discharged, the creditor has the burden of showing that the debtor did not intend to repay the advance at the time the advance was taken.
Some credit card creditors have attempted to argue that balance transfers between credit cards should be presumed to be not discharged on the same theory as cash advances. However, bankruptcy Courts have drawn a distinction between cash advances and balance transfers: with cash advances, the debtor is enriched; with balance transfers, debtors are simply refinancing debt to a card with (presumably) a lower interest rate. There is no enrichment of the debtor with balance transfers; therefore, courts have said these transfers are subject to a debtor’s general discharge.
Debts Incurred by Fraud or False Pretenses
Debts incurred by a debtor who has obtained money, property or credit by deceiving a lender cannot be discharged in a bankruptcy case. The Bankruptcy Code requires that in order for the debt to not be discharged, the debtor must have obtained money, property and/or credit through false pretenses, a false representation, or “actual fraud.” There is no Bankruptcy Code definition of these terms, but in the law, actual fraud requires that a debtor make a false representation of a material fact, upon which the lender reasonably relied, to the lender’s detriment.
This is the long-held common law definition of fraud - it requires that the fraudulent party intentionally mislead another party. The false representation must be of a fact that is, while perhaps not central to a transaction, certainly important to the proposed financial transaction taking place, and the lender must have relied on the representation in good faith, and as a result of the false representation, the lender must have suffered damages.
If all these elements are present, the creditor can successfully except the debt from the bankruptcy debtor’s general discharge. In cases of false representations, there is no burden-shifting; the creditor always has the burden of proving the fraudulent behavior.
Next week I will look at one more exception to discharge that must be brought forward by the creditor. I’ll also look at the mechanics of the adversary proceeding to except a debt from discharge and I’ll discuss the chapter 13 “Superdischarge.”