When a Creditor Accuses You of Misusing Credit

Law Office of Robert L. Firth May 16, 2016

Reduce the risk that a creditor will prevent you from discharging some of its debt by smart timing of your bankruptcy.

The Role of Honesty in Creating a Debt

One of the principles of bankruptcy is that honest debtors get relief from their debts, dishonest ones may not. One way to be “dishonest” in the eyes of the bankruptcy laws is to use credit when there is no intention of paying it back.

That makes some sense. Each time you sign a promissory note or use a credit card you are promising to pay that debt. Whether you are directly stating that in writing (for example, in the contract with a creditor) or else implying it (for example, by writing a check), that makes common sense.

And it’s the law: a creditor can challenge your ability to write off a debt if you did not intend to pay it when you incurred it.

Creditors Must Show Dishonest Intent

But most of the time when a person takes out a loan or uses a credit card, he or she DOES intend to pay the debt. The law respects that reality by saying that most general debts are discharged (legally written off in bankruptcy) unless the creditor can prove to the court that the debtor had bad intentions when incurring the debt.

So, for example, if a person completes a credit application with inaccurate information, for the creditor to successfully challenge the discharge of that debt it would not only have to show that this inaccuracy was “materially false,” but also that the person provided that information “with intent to deceive” the creditor. See Section 523(a)(2)(B) of the Bankruptcy Code.

That’s a relatively difficult thing for a creditor to prove.

Dishonest Intent Can Sometimes Be Inferred

The law recognizes that it’s quite hard to prove an “intent to deceive.” So the Bankruptcy Code gives creditors a bit of an advantage in a certain situation—when you make a consumer purchases or cash advances within a short period of time before filing bankruptcy. This advantage is limited but can make a significant practical difference.

The advantage: your use of credit is PRESUMED to have been done with the intent to not pay the debt if it was done within a certain short period of time before filing.

The theory is that a person who files bankruptcy was likely considering doing so for at least some time before actually filing. So if you incurred new debt during that time, the theory goes, you likely weren’t intending to pay back that particular debt.

As a result the bankruptcy law says that this new portion of the debt is “presumed to be nondischargeable.”

Limitations on the “Presumption of Fraud”

This presumption is less dangerous than it may seem because it is limited in lots of ways:

  • Covers only two narrow situations:

    • 1) cash advance(s) totaling more than $950 from a single creditor made within the 70-day period before filing bankruptcy;

    • 2) purchase(s) totaling more than $675 from a single creditor made within the 90-day period before filing bankruptcy, IF those purchases were for “luxury goods or services”—defined rather broadly as anything not “reasonably necessary for the support or maintenance of the debtor or a dependent.”

  • The debtor can override the presumption by convincing the court—by personal testimony and/or other facts—that he or she DID, at the time, intend to pay the debt at issue.

  • Applies only to consumer debt, not debts incurred for business purposes.

  • The presumption applies only to the purchase(s) or cash advance(s) made during the period at issue; it does not apply to the entire balance owed.

  • The creditor has to formally challenge the discharge within a very short time, usually about 3 months after your case was filed.

So there is no presumption of fraud, and no presumption that the debt won’t be discharged, IF:

  • any cash advances from any one creditor add up to $950 or less within the 70-day period before filing bankruptcy; or

  • any credit purchases for non-necessities from any one creditor add up to $675 or less within the 90-day period. See Section 523(a)(2)(C).

Avoid the Presumption of Fraud

These time-limitations means that one straightforward way to avoid the presumption of fraud altogether is to wait long enough between until enough time has passed since your last use of credit before filing bankruptcy. These 70- and 90-day periods are short enough that in most situations you’d be able to delay filing until after they’ve expired.

That is, this is easy unless you have some urgent need to file the case. If so, it may or may not be worth waiting, depending on what’s at risk either way. Your attorney will help you weigh those risks and decide when it would be best to file your case.

Creditor Challenge Beyond the Presumption Periods

Realize that a creditor may decide to challenge the discharge of its debt without relying on the presumption. A creditor could still believe that the facts overall indicate to it that you did not intend to repay a debt, or that you incurred the debt dishonestly in some way.

However, these kinds of challenges are relatively rare because:

  • As stated above, the creditor has the burden of proof, and bad intentions can be hard to prove.

  • The creditor can spend a lot of money on its attorney fees to make the challenge, with a big risk that the debts will just be discharged anyway.

  • The creditor may also be required to pay YOUR attorney fees incurred for defending the challenge if it loses. See Section 523(d).

Bottom Line

If you made a consumer purchase or cash advance—or more than one—within the 70-day and 90-day presumption periods and totaling more than the dollar amounts stated above, if you can wait to file bankruptcy until you’re beyond those time periods. And if you have any concerns about whether that or any other debt might be challenged because of how you incurred the debt, again talk with your bankruptcy lawyer so that you can be advised about the risks, and can proceed appropriately.