Is All Credit Card Debt Dischargeable Under a Chapter 7?

Massive credit card debt often forces people into bankruptcy. With low introductory rates and pre-approved offers, gold and platinum credit cards are just a signature away. Combine those features with low minimum payments and automatic credit limit increases, and individuals have many opportunities to get lost in a sea of credit card debt. For many, bankruptcy is the only financial relief option.

A Chapter 7 bankruptcy allows the discharge of most credit card debt with some exceptions. Credit card charges incurred under false pretenses, representation or fraud are ineligible for discharge depending on date of use. The burden of proof falls on the creditor if the purchase occurred more than 90 days before the bankruptcy. The creditor must show subjective intent. This means the creditor must prove that you purposely made the purchase with no intent to pay. Showing you do not have the income to repay the debt does not qualify as subjective intent.

To prove you obtained credit under false pretenses, representation or fraud, the creditor must establish four elements by a preponderance of the evidence:

  • False representation– Creditors must prove you made a false representation to gain credit, such as falsifying income or other financial information.
  • Knowledge or willfulness-The creditor must prove you knew the information was false. A reckless disregard for the truth constitutes willfulness.
  • Intent-The creditor must prove you intended to deceive.
  • Justifiable Reliance-The creditor must prove it relied on the false representation to extend credit. Reliance must be justifiable, not reasonable.

The creditor does not have to meet the burden of proof if the charge meets two requirements. The charge must occur within three months of the bankruptcy, and the total charges must be over $500 for a single creditor if the charge was for luxury goods or services.

Luxury items refer to any item not required for the reasonable support and maintenance for you or your dependents. Examples include:

  • Extravagant trips
  • Designer clothes
  • Jewelry
  • Recreation vehicles such as motorcycles and three-wheelers
  • Car stereos
  • Computers
  • Furniture
  • Video games
  • DVDs and CDs
  • New car when the debtor has more than two vehicles

Some luxury goods qualify for discharge if deemed necessary for support and maintenance. For example, furniture purchased for beautification purposes qualify as a luxury item. However, reasonably priced furniture purchased to replace damaged furniture qualifies as a non-luxury item. A new car may qualify as a non-luxury item if purchased as transportation to the workplace. Examples of other non-luxury items include gas, groceries or utility payments. Showing a catastrophic occurrence, such as a fire, illness or death, can also be a viable defense against fraud.

Cash advances of more than $750 on one of your credit accounts within 70 days before filing are also presumed nondischargeable.

If your creditor thins a cash advance or purchase of luxury goods should be declared as not discharged, the creditor still would have to bring an action in bankruptcy court. This happens very not very often. Our office see such an action probably once in every 1000 bankruptcy cases. I remember one case in which the debtor paid a cruise with their credit card shortly before filing. The cruise was long planned and was a reunion of their family. This nonetheless a luxury good that was presumed nondischargeable. The debtor and creditor agreed to pay part of the charges made for the cruise. Most often motions filed by creditors can be settled by debtor’s bankruptcy attorney without having a court hearing. Often, the creditor might accept a partial payment in order to reduce his litigation expenses. If the creditor has to pay an attorney to litigate a credit charge in bankruptcy court, the creditor might end up paying more to his attorney than he will recover through the process. That is one of the reasons creditors do not bring such actions very often.

Disputing a fraud claim can be difficult. You must prove that you intended to repay the debt by providing supporting evidence. A mere statement will not satisfy your burden of proof. Contact a qualified bankruptcy attorney to discuss the best course of action.

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