Dischargeable vs. Non-Dischargeable Debt
When you file a consumer bankruptcy case – Chapter 7 or Chapter 13 – most debts are discharged. You never have to pay a discharged debt. Some debts, however, are not discharged. These include –
Debts protected by law.
Congress has determined that some debts should not be discharged in bankruptcy or can be discharged only with certain conditions.
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For example, spousal support, alimony, and child support cannot be discharged.
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In most cases, student loans cannot be discharged.
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Finally, if you have not filed your tax returns, your unpaid income taxes cannot be discharged. If you have filed, you must wait at least three years to discharge the tax due.
Reaffirmed Debts.
Some debtors exclude debts from discharge. This is done by reaffirming the debt. If you sign a “reaffirmation agreement” and the court approves it, your “reaffirmed” debt is not discharged. Many debtors reaffirm their secured debts.
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For example, if you own a car and have a car loan, you might choose to keep the car and the debt. In that case, you reaffirm your auto loan, keep your car, and continue to pay the lender.
Debts Obtained Through Fraud.
If you acquire debt by giving false information on a loan application or giving a false promise to pay, the creditor can object to discharge.
This situation gives rise to a question about the dischargeability of recent credit card purchases. As you will see, debt incurred to pay for “reasonably necessary” expenses is almost always dischargeable. In contrast, debt incurred for “luxury goods and services” or significant “cash advances” may not be dischargeable.
The Fraud Exception to Discharge.
Federal law states a creditor can object to discharge of a particular debt if it was “obtained by . . . false pretenses, false representation, or actual
fraud . . .” See 11 U.S.C. §523(a)(2) of the Bankruptcy Code.
A fundamental principle of bankruptcy law is that debtors are good people who need assistance. Therefore, you cannot cheat a creditor and then ask a court to cancel your debt to that creditor. You must act in good faith, and you must have intended to repay the debt when you incurred it. If you did not intend to repay the debt, you might be accused of obtaining credit through fraud.
The Legal Presumption of Fraud?
The legal presumption of fraud makes it easy for a creditor to prove that your debt should not be discharged. If the presumption exists, the court will “presume” you committed fraud by taking on debt you did not intend to repay.
First, a little theory –
The “presumption of fraud” is a legal concept that relies on the belief that a debtor on the verge of bankruptcy knows he or she cannot repay new debt. Therefore, if that person borrows knowing they cannot repay, they probably never intended to repay. And they must have intended to cheat the creditor. That’s a fraud!
There are two circumstances where the presumption of fraud arises:
1. If, in the 90 days before filing bankruptcy, you buy more than $650 of “luxury goods or services,” the debt is presumed to be non-dischargeable. Using the presumption of fraud, the creditor does not need to prove your intention. Instead, the court will presume it.
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Did you use a credit card to put a down payment on a luxury Jaguar automobile?
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If you did that within 90 days of filing bankruptcy, the court will presume you did not intend to repay the credit card issuer, and it would not discharge your obligation.
This presumption of fraud only applies to the purchase of “luxury goods or services.” Regrettably, Congress defined “luxury goods or services” broadly. The phrase includes everything except goods or services “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” See 11 U.S.C. §523(a)(2). Fortunately, groceries and gas are “reasonably necessary” expenses. And debts incurred to buy these necessities can be discharged even if the debt is incurred during the 90 days before bankruptcy.
2. The “cash advance” presumption of fraud is similar to the “luxury goods and services” presumption. It states: If a consumer incurs a debt of more than $925 through one or more cash advances made in the 70 days before filing bankruptcy, the debt is presumed to be non-dischargeable. The creditor needs only to establish that you made more than $925 in cash advances during the 70 days before filing for bankruptcy for the presumption to apply. 11 U.S.C. §523(a)(2).
If a Presumption of Fraud Applies, Can You Overcome It?
You can rebut the presumption of fraud by demonstrating to the bankruptcy judge that you truly intended to repay the debt. Your direct testimony about your intention to repay the debt along with evidence that something unexpected forced you into bankruptcy after the luxury purchase or cash advance, can rebut the presumption.
How Does a Creditor Assert a Claim of Fraud?
A creditor must formally object to the discharge of any debt it thinks you incurred fraudulently. Without a formal objection by the creditor, the debt will be discharged. The creditor’s objection must be in an adversary proceeding. An adversary proceeding is a separate lawsuit filed at the bankruptcy court.
The creditor must provide evidence proving your alleged fraud or misrepresentation. Without the presumption of fraud, a creditor needs to present convincing evidence that you did not intend to pay the debt. That requires proving your state of mind, something that’s hard to do. Therefore, creditors are unlikely to challenge purchases and cash advances made before the 70-day and 90-day presumption periods.
But the presumption of fraud makes it easy. The creditor does not need direct evidence of fraud and can win just by showing you made a luxury purchase or significant cash advance during the presumption period.
How Can a Debtor Avoid the Presumption of Fraud?
You can avoid giving a creditor the advantage of the presumption of fraud. First, don’t use any credit or make cash advances during the prohibited period. If you have made purchases or cash advances, delay filing bankruptcy until time has passed beyond the 70 and 90-day presumption periods.
