You can avoid the presumptions of fraud, and so discharge more of your credit card debts, by timing your bankruptcy filing right.
This blog post continues a series about the smart timing of your bankruptcy filing started back in July. (It’s been interrupted by urgent blog posts related to the pandemic—about unemployment benefits and the federal eviction moratorium.) The last in this timing series was about how bankruptcy timing helps with income tax liens.
Important Examples of Good (and Bad) Timing
Since it’s been so long since we introduced this, here is a list of some of the main consequences of good and bad bankruptcy timing. Whether:
- the bankruptcy case includes recent or ongoing debts or not
- you have to pay an income tax in full, in part, or not at all
- you must pay interest and or penalties on an income tax because of a tax lien
- you can discharge (legally write off) a credit card debt, or a portion of it
- you can discharge a student loan debt
- you qualify for a vehicle loan cramdown—reducing monthly payments, interest rate, and total debt—and still keep the vehicle
- you qualify for a personal property collateral cramdown—paying less—and still keep the collateral
- you stop the repossession of your vehicle in time, or lose it to the vehicle loan creditor
- you prevent the foreclosure of your home in time, enabling you to catch up over time
- you get more time to sell your home, including possibly years more
- you qualify for a Chapter 7 case under the “means test,” or instead must file under Chapter 13
- you qualify for a 3-year Chapter 13 payment plan or instead must pay for 5 years
- your sale or gifting an asset is a “fraudulent transfer”
- your payment to a friendly creditor is a “preference” and must be returned
- you can keep all of your assets if you’ve moved from one state to another in the past several years
We give you this list again here to give you an idea how important the timing of your bankruptcy can be. There’s a good chance that one or more apply to you. If they do, to learn more, please call a bankruptcy lawyer to see how these apply to you.
We covered #3 about income tax liens in a number of blog posts. Today we start into #4: how bankruptcy timing affects the discharge of credit card debts.
Avoiding a “Presumption of Fraud” through Good Timing of Bankruptcy
A main goal of bankruptcy is to forever discharge your debts. Under limited circumstances a creditor can challenge your ability to discharge a debt. One of those circumstances involves the length of time between when you incurred the debt and when you file bankruptcy. If you file bankruptcy too soon after incurring the debt its creditor may more easily be able to challenge your ability to discharge that debt. There’s a “presumption of fraud” regarding that debt, or the portion that was incurred shortly before the bankruptcy filing.
There’s a basic principle in bankruptcy law about honest debtors. People should generally be able to discharge their honestly-acquired debts. But debts acquired by being dishonest with creditors should not be discharged.
The dishonesty at issue here involves lying to qualify for or to use credit. Examples are giving false information when applying for credit or writing a check that you know will not be good. Or using a credit card for a cash advance or purchase that you never intend to pay. The creditor who you owe on a debt incurred like this could try to prevent you from discharging its debt. Its grounds for challenging the debt discharge would be that you incurred the debt through dishonesty or fraud.
(Note that most people acquire their debts honestly. So their creditors don’t have grounds for objecting to the discharge of the debts. This includes credit card creditors. So creditor challenges to the discharge of debts are relatively unusual. The point is that you can act appropriately to minimize such challenges by your creditors.)
What’s a “Presumption of Fraud”?
Dishonesty and fraud are hard for a creditor to prove. That’s because they requires evidence of a debtor’s bad intentions. The creditor has to show evidence that a person got or used credit through dishonest intention.
Because banks have a lot of influence over the laws, the Bankruptcy Code contains “presumptions of fraud.” These acknowledge that it’s difficult to get into the minds of debts to know their good or bad intent. These “presumptions” presume bad intent under certain factual circumstances. When these factual circumstances are met, the law presumes that the debt at issue is fraudulent. That is, that the debt will not get discharged in bankruptcy.
However, the debtor can then present other evidence that the debt was in fact honestly incurred. That evidence may convince the creditor to drop the challenge. Otherwise a bankruptcy judge weighs the evidence. He or she determines whether the debtor incurred the debt honestly and thus whether to discharge the debt.
So, a “presumption of fraud” makes it easier for a creditor to establish that a debt is fraudulent. The creditor needs less evidence. It will win unless the debtor responds and convinces the creditor and/or the judge that it was an honest debt.
The Factual Circumstances for the “Presumptions of Fraud”
There are two sets of facts in which a creditor doesn’t need to provide evidence of a debtor’s dishonest intention. Fraud is presumed to have occurred. A creditor just needs to show that the set of fact are met—that certain facts are true.
These facts involve the timing and amount of a credit card purchase or cash advance.
The first set of facts: buying more than $725 in “luxury goods or services” from any single creditor during the 90-day period before you file your bankruptcy case. “Luxury goods and services” applies to just about anything which isn’t a necessity. A debt of more than $725 incurred in the 90 days before filing bankruptcy is presumably fraudulent. That means bankruptcy will not discharge that debt. (Again, this assumes the debtor does not challenge and prevail against this presumption.) See U.S Bankruptcy Code Section 523(a)(2)(C)(i)(I), with the dollar amount adjusted and valid from 4/1/19 through 3/31/21.
The second set of facts: making a cash advance of more than $1,000 from any single creditor during the 70-day period before you file your bankruptcy case. Such a cash advance would be presumably fraudulent, and bankruptcy would potentially not discharge that debt. Bankruptcy Code Section 523(a)(2)(C)(i)(II), with the dollar amount adjusted and valid from 4/1/19 through 3/31/21.
The rational basis for these presumptions is that filing bankruptcy so soon after incurring such debts likely means you didn’t intent to pay them. Again, that assumes you don’t give convincing evidence to the contrary.
Bankruptcy Timing and These “Presumptions of Fraud”
Notice how precise the timing is in these two presumptions. They apply only if you file bankruptcy within the applicable 90-day and 70-day periods after incurring the debts. So you can altogether avoid these presumptions of fraud by simply waiting to file bankruptcy until after those periods of time have passed.
This blog post is already way too long. So next week we’ll look at some practical aspects of timing your bankruptcy in light of these presumptions of fraud.