The Risks in Discharging Debts for “Luxury Goods or Services” and Cash Advances

If you’ve made certain recent credit card purchases or cash advances, writing off those debts may be challenged in bankruptcy.

During that last three weeks I’ve been writing about the types of debts that get discharged (legally written off) and those that don’t. I included in the list of those debts that risk not being discharged those debts “incurred through fraud or misrepresentation, such… those credit card cash advances and purchases done while intending not to pay the debt.” One special category of those is the topic of today’s blog post.

The Fraud or Misrepresentation Exception

The intent behind this exception is that a debtor who cheats the creditor in the process of borrowing money or getting credit should not be able to discharge that debt in bankruptcy. The federal Bankruptcy Code says that a creditor can challenge your ability to write off a particular debt “to the extent obtained by… false pretenses, false representation, or actual fraud… “.

Debts incurred through fraud or misrepresentation are still discharged UNLESS the creditor formally objects to the discharge of the debt, AND does so very quickly. The objection must be in the form of a lawsuit the creditor files at the bankruptcy court alleging the debtor’s fraud or misrepresentation that would justify the debt not being discharged. The creditor would then need to prove those facts with evidence. The debt is only not discharged if the creditor convinces the bankruptcy judge that the debt was in fact obtained by the debtor’s fraud or misrepresentation.

The “Presumption” of Fraud

A presumption in the bankruptcy law that a debt would not be discharged makes it much easier for a creditor to prevail on that point. A creditor simply needs to establish that certain facts apply to the debt being challenged, and then that debt is “presumed” not to be discharged.

The debt then will not be discharged unless the debtor brings contrary evidence showing the lack of fraud or misrepresentation by him or her. The presumption “shifts the burden of proof” from the creditor to the debtor.

This is quite important from a practical perspective. Because litigation is expensive, most cases are settled before going to trial. That is especially true when the amount at issue is relatively small, much less than the costs of litigating the dispute in court. So the presumption in favor of the creditors makes it 1) much more likely that they will win when debtors don’t bother to fight back, and 2) creditors will force debtors to pay something to avoid the costs of litigating even when the creditors may not have a strong case.

Congress has given creditors the presumption of no discharge in two specific situations.

“Luxury Goods or Services”

The first presumption arises if a consumer incurs a debt of more than $650 in “luxury goods or services” in the 90 days before filing the bankruptcy. That debt is presumed not to be discharged, which again means that the creditor doesn’t need to bring evidence establishing that the debtor intended to cheat the creditor by not paying the debt. The idea is that the person making the purchase knew he or she was going to file bankruptcy and was not going to pay the debt, or else at least was quite reckless to be using credit so near to filing bankruptcy.

Be aware that “luxury goods or services” are broader in the law than the phrase sounds. They include anything except those “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” It’s largely up to the debtor to persuade the court that the goods and/or services totaling more than $650 were “reasonably necessary,” or that the debt was incurred with the honest intention of paying it (thus rebutting the presumption).

The Cash Advances Presumption

The second presumption arises if a consumer incurs a debt of more than $925 through a cash advance or advances made in the 70 days before filing the bankruptcy. In the same way as with the “luxury goods” presumption, the creditor does not need to bring evidence establishing that the debtor did not intend to pay the debt. Also in the same way, the debtor can try to persuade the court that the cash advance was incurred with the intention of paying it (thus rebutting the presumption).

A Presumption is Not Necessary

If a “luxury good” was purchased MORE THAN 90 days before your bankruptcy case is filed or if a cash advance was made MORE THAN 70 days before then, these would not necessarily stop a creditor from challenging your ability to discharge that debt. The presumption would simply not apply in these situations. So the creditor would have to show the court convincing evidence that you did not intend to pay the debt, without the benefit of the presumptions. Since this kind of evidence is often not easy to find, creditors are not as likely to challenge purchases and cash advances that were made prior to the 90- and 70-day presumption periods.

Avoiding These Presumptions

You can avoid these two special presumptions of fraud by not using any credit and making cash advances for a long time before filing bankruptcy. But if you did during the applicable 70/90 days before seeing an attorney, he or she may advise you to wait to file until enough time has passed to get beyond these 70 and 90-day periods. That’s if you don’t have an urgent need to file your case.

Again remember that if the presumption doesn’t apply (for example, because more than the 70-/90-day periods have passed), that may make it less likely that a creditor will raise a challenge, but it doesn’t necessarily mean it won’t happen. A creditor could still think it has evidence that you incurred the debt without intending to pay it, or that there was some other kind of fraud or misrepresentation involved. So the creditor could still challenge the discharge of the debt without the benefit of a presumption.