Credit card issuers sometimes challenge the discharge of credit card debt in bankruptcy by filing a complaint objecting to the dischargeability of the debt (also known as an “adversary proceeding”) claiming that the debt was fraudulently incurred and therefore should be excluded from the discharge.
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.
Any “luxury” purchase (such as expensive jewelry) made on a credit card within 90 days prior to filing bankruptcy, and any “cash advance” made within 70 days prior to filing bankruptcy, is presumed to be fraudulently incurred. However, the debtor may rebut this presumption by showing that he did not intentionally make luxury purchases or cash advances on credit cards without any intention of paying for them.
For example, if the debtor was offered a well-paying job and went out and made luxury purchases or cash advances, but the job offer subsequently fell through, this would not be fraudulent. If the debtor was employed and had sufficient income to make minimum credit card payments when he made the luxury purchases or cash advances, but then lost his job, this would not be fraudulent.
But if the debtor was unemployed and had no meaningful source of income to pay for expensive credit card charges at the time they were made this could be considered fraudulent, especially if the debtor charged up his credit cards shortly before filing bankruptcy.
The issue of whether or not certain credit card charges or other debts were fraudulently incurred does not normally arise in a bankruptcy proceeding unless the creditor files a complaint objecting to the dischargeability of the debt. In actuality, most creditors do not file a complaint objecting to dischargeability of a debt even in cases where they would likely prevail because the attorney fees and court costs they would incur outweigh any benefit they might receive if they are successful.
Even if the creditor obtains an order of non-dischargeability it does not result in immediate payment of the debt. It simply means that the debtor still owes the creditor and it can try to collect it from him after the bankruptcy.
Currently, there is a $250 court filing fee to file a complaint objecting to the dischargeability of a debt. The creditors attorney fees, even in a simple and clear-cut case, could easily be $1,500 to $5,000 or more. Therefore, unless the credit card charges are substantial and there is clear-cut fraud involved (such as an obvious spending spree shortly before filing bankruptcy), creditors rarely contest the dischargeability of credit card debts in bankruptcy proceedings.