It can be a “red flag” to creditors where a Debtor has actively used credit cards for purchases or cash advances shortly before filing bankruptcy. However, it is not true that all (or even most) such recent charges are “non-dischargeable” (that is, that the debts are not wiped out by the bankruptcy). Sometimes this pattern is a problem, and sometimes it is not. While Congress often changes the amounts or timing in this section, as of 2019 the Code provides that:

1) purchases of “luxury goods or services” of at least $500.00 made within 90 days of filing, or 2) cash advances of at least $750.00 made within 70 days of filing are 3) “presumed” to be non-dischargeable. This code section has several parts.

First, the “presumption” favoring creditors does not arise automatically just because a purchase or cash advance is made within a certain number of days before bankruptcy. The “presumption” is only triggered if the purchases or cash advances are used for “luxuries”… that is, if they are not “reasonable necessary for the support and maintenance of the Debtor or his dependents”. Some cases have defined “luxuries” as items that are “extravagant, indulgent, or nonessential”, while others have held that purchases are not luxuries if they “serve an important family function and evidence some financial responsibility”. The facts of each particular case are key. “Luxuries” should not include charges for most medical expenses, automotive repairs, discount purchases at stores like Walmart, or everyday food expenditures at a grocery store or low-end restaurant. On the other hand, gifts are normally considered to be “luxuries”.

Second, for the “presumption” to arise, the creditor must be specific in pleading the facts that are being complained about. If he is too vague, then the creditor, not the Debtor, must carry the burden of proof with regard to proving fraud (a high hurdle). This is much more difficult and expensive for the creditor, and it is not undertaken lightly. Moreover, even if the “presumption” does arise, the Debtor can still win, but he must carry the burden of proof himself to do that.

Third, in any action based on fraud, the “intent” to mislead or deceive is an important element. However, “intent” is hard to prove or disprove by direct evidence, and is usually decided based on the surrounding facts. For example, changes in credit card usage and a high number of charges right before filing, or even charges made right after consulting a lawyer may suggest an intent not to repay the debt. Unusual patterns of credit card usage can motivate questions about the charges that need to be answered… whether the creditor ultimately decides to file suit or not.

For the court to find that a debt is non-dischargeable, the creditor must first file a separate suit within the bankruptcy called an “adversary proceeding”. The attorney fees in an adversary proceeding can be prohibitively expensive. Unfortunately, the creditor (usually a bank) generally has more money than the Debtor, which creates unfair pressure on the Debtor to “settle” a suit even if it is winnable. In a settlement, the Debtor agrees to repay the debt in whole or in part after the bankruptcy (usually in installments) to avoid the high costs of litigation.

Fortunately, Congress has recognized that there is a great potential for creditor abuse in this area because of the parties’ unequal bargaining power. Thus, the Code provides that if the creditor files an adversary proceeding, and if the debt ultimately is discharged, that the creditor “shall” pay the Debtor’s attorney fees unless the creditor can prove that the filing of the suit was “substantially justified”. This usually requires proof that a meaningful investigation was undertaken before filing the suit, or that the creditor undertook “discovery” in the suit to sort out the facts in a meaningful way. These steps cost money, and discourage creditors from filing frivolous suits. Please call us at 770-683-3303 to talk to our lawyers about your particular situation.