Creditors will be a little less likely to challenge the writing off of recent uses of credit.
As of April 1, 2016 creditors will have slightly harder time showing that recent credit purchases or cash advances were fraudulent and so can’t be written off (“discharged”) in bankruptcy. That’s because to qualify for a “presumption of fraud,” creditors will need to have a higher dollar amount threshold before that presumption kicks in. The “presumption of fraud” makes it easier for a creditor to object to the discharge of a debt. With the new higher threshold, the “presumption” will not kick in quite as often, to the benefit of consumers filing bankruptcy.
If you’ve made credit purchases or cash advances in the last few months and are considering bankruptcy, this may benefit you.
Discharge of Debts in Bankruptcy
When you file bankruptcy most kinds of debts are discharged so that you never have to pay them. But certain select debts are never discharged—such as past-due child support. And some kinds of debts are discharged unless the creditor objects to the discharge and persuades the bankruptcy court that certain conditions are met so that discharge is not legally appropriate.
Debts of this last kind—that may be objected to—include those allegedly incurred through fraud or misrepresentation. Among those are recent ‘luxury’ purchases and cash advances. Under certain circumstances the Bankruptcy Code says those “are presumed to be nondischargeable.” How does this “presumption” work, and how could the upcoming adjustments in the law help you?
The Fraud Exception to the Discharge of Your Debts
One of the principles of bankruptcy is that you can’t purposely cheat a creditor in the incurring of a debt and then later discharge that debt through bankruptcy. Specifically, a creditor can challenge your ability to write off a particular debt if it was “obtained by… “false pretenses, false representation, or actual fraud… .” See Section 523(a)(2) of the Bankruptcy Code.
What’s a “Presumption”?
As mentioned above, a creditor has to object to the discharge of a debt that it thinks you incurred fraudulently, or else that debt will be still be discharged. In its objection the creditor normally has to provide evidence to the court proving your alleged fraud or misrepresentation. A presumption of fraud allows the creditor’s objection to go forward even without direct evidence of fraud. All it needs to show that certain circumstances arise that give rise to a “presumption” that you’ve committed fraud in how you incurred the debt.
The two sets of circumstances in which a presumption of fraud arises are with purchases of “luxury goods or services” and with cash advances, both occurring within a certain amount of time before the filing of your bankruptcy case.
The “Luxury Goods or Services” Presumption
Before April 1, 2016 if a consumer buys more than $650 in “luxury goods or services” in the 90 days before filing the bankruptcy, that debt is presumed not to be dischargeable. That means that the creditor may not need to provide direct evidence that the debtor did not intend to pay the debt at the time the purchase.
The rationale behind this presumption is that there is a sensible chance that within that short of a time before filing bankruptcy most debtors would either know that he or she intended to file bankruptcy, or would be considering doing so. If so, then at the time of purchase there is a greater likelihood the debtor did not have the intention to pay the debt arising from that purchase.
This presumption only applies to the purchase of “luxury goods or services.” But the meaning of this phrase is much broader than it sounds. It includes everything except goods or services “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.”
As of April 1 the $650 threshold of “luxury goods and services” purchased within the 90 days before filing is increasing from $650 to $675. That means that you can make slightly more in purchases during this time period before the presumption kicks in. So this advantage for creditors is being narrowed a little. (See Section 523(a)(2)(C)(i)(I).)
The Cash Advances Presumption
Similarly, if a consumer incurs a debt of more than $925 ($950 starting April 1) through one or more cash advances made in the 70 days before filing the bankruptcy, then that debt is presumed not to be dischargeable. Again, that means that the creditor may not need to prove through evidence that the debtor did not intend to pay the debt at the time the cash advance. (See Section 523(a)(2)(C)(i)(II).)
The Presumption Can Be “Rebutted”
We are saying that the creditor MAY not need to prove fraud because that occurs only if you don’t respond by “rebutting that presumption.” Once the creditor “raises the presumption” by alleging the necessary facts to fit within the presumption, you can force the creditor to back up the presumption with evidence. The creditor can win with only the presumption of fraud if you don’t push back. But with the right facts you can defeat the presumption and not have to pay the debt.
Assume, for example, that you made a cash advance of more than $925/$950 within the 70 day period before filing bankruptcy, and the creditor objects to the bankruptcy court. If you in fact did intend to pay the debt at the time you made the purchase, you would respond to the court about your honest intent. You and your attorney would do this through your own direct testimony about your intent and/or by establishing other relevant facts, such as what happened in your financial life after you made the cash advance which then drove you to file bankruptcy and seek to discharge that debt.
A Creditor Can Bring Evidence of Fraud without a Presumption
On the other hand, a creditor can object to the discharge of a debt on grounds that you didn’t intend to pay it at the time of the purchase or cash advance or some other kind of fraud, and do so without the presumptions. For example, a creditor could object to the discharge of a debt that was incurred through a misrepresentation, such as with a credit application that greatly exaggerates a debtor’s income or assets, a year or two before the bankruptcy filing.
A presumption helps a creditor in the circumstances where they apply. But if a presumption doesn’t apply, the creditor could still potentially challenge your ability to discharge that debt. The creditor would have to give the court strong evidence that you did not intend to pay the debt, which is usually not easy to come up with. That’s why creditors are not as likely to challenge purchases and cash advances that were made outside the presumption periods.
Avoiding These Presumptions of Fraud
You can avoid giving a creditor the advantage of these presumptions. First, you can avoid using any credit and making cash advances in the few months before filing bankruptcy. And, second, if you’ve already incurred made such purchases and/or cash advances you could just hold off on filing bankruptcy until enough time has passed to get beyond these 70 and 90-day presumption periods.
Remember again that if a creditor thinks it has evidence that you incurred a debt that at that time you did not intend to pay, or that there was some other kind of fraud or misrepresentation, the creditor may still decide to raise the issue without the benefit of a presumption. But if you avoid filing within the 70/90-day presumption periods you will decrease the chance that a creditor will challenge the discharge of its debt.