Likely you’ve not committed any fraud preventing you from writing off your debts in bankruptcy. But how about “presumptions of fraud”?
Last month, in the midst of the holidays, we wrote about how to avoid the two “presumptions of fraud” during that particularly vulnerable period for that issue. Now that we’re into the new year, let’s look at this issue from another perspective—how to avoid being accused of “presumptions of fraud” through wise timing. Otherwise you could act completely honorably with all your creditors and yet be forced to pay one or more of your debts in bankruptcy. We explain here how to prevent this from happening.
What is “Fraud” in Bankruptcy?
A basic principle of bankruptcy law is that while honest debtors should generally be able to discharge (legally write off) their debts, debts acquired by lying to creditors should not be discharged. We’re talking here about lying to qualify for or to use credit, such as giving false information when applying for credit or writing a check that you know will not be good. The creditor who does not get paid on a debt incurred like this could try to prevent you from discharging its debt.
So What’s a “Presumption of Fraud”?
Fraud is hard for a creditor to prove because it generally requires evidence of a debtor’s intentions—getting or using credit through a deceitful intent. To make it easier for creditors to make their case, Congress created “presumptions of fraud.” These are two sets of circumstances—one applicable to credit card purchases and the other to cash advances—in which a creditor does not need to provide ANY evidence of a debtor’s intention because fraud is presumed to have occurred. A creditor just needs to establish that the factual circumstances laid out by the presumption law are in effect.
The Two “Presumptions of Fraud”
Both “presumptions of fraud” are based on very specific facts involving the timing and amount of the purchase or cash advance. If those facts are established, the law will presume that you incurred or used the credit without intending to repay it.
First, if you buy more than $650 in “luxury goods or services” (which applies to just about anything which isn’t a necessity) from any single creditor during the 90-day period before your bankruptcy is filed, that specific debt is presumed not discharged.
Second, if you make a cash advance of more than $925 from any single creditor during the 70-day period before your bankruptcy is filed, the debt reflecting that cash advance is presumed not discharged.
Avoiding the Presumptions through Timing of Bankruptcy
Because of the precise timing restrictions of these two presumptions, you can avoid them by simply waiting to file bankruptcy until after the applicable 70-day and 90 day periods.
Consider if you took out a $1,000 cash advance on a credit card on December 15, 2013 and on the same day purchased a round-trip airline ticket to Hawaii and hotel accommodations there totaling $750. A presumption would exist that the cash advance was fraudulent and would not be discharged if the bankruptcy was filed within 70 days of December 15, 2013, that is, by February 23, 2014. A presumption would exist that the airline ticket and hotel room purchases were fraudulent and would not be discharged if the bankruptcy was filed within 90 days of December 15, 2013, that is by March 15, 2014.
To avoid the cash advance presumption under these facts, simply delay filing bankruptcy until after February 23. To avoid the credit card purchase presumption, simply delay filing bankruptcy until after March 15, 2014.
What if You Did Not Incur the Debt Fraudulently?
If you make a cash advance or purchase within these 70 and 90-day time periods, respectively, that doesn’t necessarily mean that you will have to pay the challenged debt. First, the creditor has to file a formal complaint about it in the bankruptcy court—they often don’t bother to do so. Second, if you in fact had intended to pay the debt at the time you made the purchase or cash advance, you can still win by persuading the court of your honest intent.
The Practical Need to Get beyond the Presumption Periods
But if you are able to, wait to file bankruptcy long enough to get past these 70- and 90-day periods, even if you had every intent to pay those debts when you incurred them. The reason is a practical one—even if your intentions were pure, you want to avoid tempting the creditor into challenging the debt, which it is more likely to do while it has the presumption in its favor. Once the creditor spends its energy on deciding to challenge the debt, and pays its attorney to do so, it will be very reluctant to drop the case without at least recouping some of its expenses.
Furthermore, you want to avoid racking up your own attorney fees in fighting and settling a dischargeability challenge.
So if at all possible, for these practical reasons do not give any creditors the opportunity to raise the presumption of fraud. Instead delay filing bankruptcy until past any 70 or 90-day “presumption of fraud” periods.