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Making Sense of Bankruptcy: Defeating Challenges to the Legal Write-off of “Luxury” Purchases and Cash Advances

Understanding the most common kinds of “fraud” challenge to the discharge of your debts will enable you to avoid these challenges.

Here’s the sentence that we’re explaining in this blog post today:

Bankruptcy law makes it comparatively easy for credit card companies to challenge your ability to discharge (permanently write off) credit card debts specifically for “luxury” purchases and cash advances that are made relatively recently before the filing of your bankruptcy case, but it’s not hard for you to take away this advantage for them.

The “Fraud” Exception to Discharge and the Presumptions of Fraud

Our last blog post a couple days ago explained that debts incurred through a debtor’s “fraud” might not be discharged in bankruptcy, if the creditor raises the issues by making specific allegations of the debtor’s wrongdoing and does so by a very quick deadline. This challenge to the discharge of a debt is raised by the creditor through a lawsuit (called an “adversary proceeding”) filed in the bankruptcy court.

“Luxury” purchases and cash advances are a special subcategory of this “fraud” exception, one which is easier for creditors to assert and win for certain procedural reasons.

Generally bankruptcy law assumes that a debt can be discharged unless a creditor can establish that the debt fits within a specified exception to discharge. That’s why the creditor must establish, for example, all of the elements of fraud or else the creditor fails to meet its burden and the debt is discharged.

But debts from certain recent cash advances and “luxury” purchases “are presumed to be nondischargeable.” This “presumption of nondischargeability” makes it easier for a creditor to require you to repay a recent cash advance or “luxury” purchase instead of having it be discharged.

Any creditor can challenge your discharge of a debt that it thinks you incurred fraudulently, but this is very rarely done. If no challenge is raised, and done so within a short window of time, the debt will be discharged. A presumption allows the creditor to prevail without necessarily presenting any evidence of fraud.

The “Luxury Goods or Services” Presumption

In this presumption, found at subsection 523(a)(2)(C)(I) of the Bankruptcy Code, if you bought more than $650 in “luxury goods or services” during the 90 days before filing bankruptcy, the part of the debt that meets those conditions (and only that part) is “presumed to be nondischargeable.” That means that the creditor only needs to establish that these circumstances apply, without being required to prove with evidence (at least at first) that you did not intend to pay the debt at the time the purchase or defrauded the creditor in some other way.

But this only means that the creditor wins with such little evidence IF you do nothing in response to creditor’s allegations. You can “rebut the presumption” by simply responding on time with evidence that you DID intend, at the time of the purchase, to pay your debt for the purchased goods or services, even though you subsequently filed bankruptcy. You can present such evidence, for example, by testifying that in fact you did intend to pay the debt at the time you made the purchases and/or by providing information about what happened in your life after making the purchase that unexpectedly induced you to file bankruptcy. The creditor then has the opportunity to present its own evidence trying to show fraud, and the bankruptcy judge decides whose evidence is more convincing.

Careful because the “luxury goods or services” phrase is misleading, covering more than would seem. All purchases are included except for goods or services “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” Clearly the presumption applies to more than just extravagant purchases.

The Cash Advances Presumption

This presumption is similar. Found at subsection 523(a)(2)(C)(II) of the Bankruptcy Code, if you make one or more cash advances with a creditor totaling more than $925 in the 70 days before filing the bankruptcy, the part of the debt that meets those conditions (and only that part) is “presumed to be nondischargeable.” All of the discussion above in the “luxury goods and services” section about how this works also applies to this other presumption.

Avoid These Dangerous Presumptions

You can avoid giving your creditors the opportunity to use either of these presumptions in two ways.

First, if at all possible don’t make any cash advances or use your credit cards during the 70 or 90 days, respectively, before filing bankruptcy. Or if you must, keep them under the $925 and $650 dollar thresholds.

Second, if you have already made cash advances or qualifying credit card purchases above those statutory dollar amounts, then delay filing bankruptcy until these 70 and 90-day periods have passed.

These ways you can avoid these presumptions being applied to you so that you would have to pay these debts (or their applicable portions).

But be aware that if you used credit in a way that was NOT within the dollar amounts and timeframes of these two presumptions, a creditor could still attempt to challenge the discharge of its debt. If the creditor believed that you never intended to pay the debt or were trying to defraud the creditor in some way, it could try to prove the elements of fraud without the benefit of the presumptions. But that’s much more difficult for a creditor to do, making less likely that it would try.