Nearly all of the individuals who visit our office have concerns about credit card debt.  While this type of debt can typically be discharged through a Chapter 7 bankruptcy, this is not always the case. Credit card issuers sometimes challenge the discharge of their debt in bankruptcy  by filing a lawsuit in the bankruptcy court – known as an adversary proceeding – claiming that the debt was incurred by fraud and therefore should be excluded from the discharge under 11 U.S.C. § 523(a)(2). (For an explanation of what an adversary proceeding is, click here).   This is sometimes called a “non-dischargeability action.”

When bringing such an action under § 523(a)(2)(A), a credit card company must prove the following elements of its case by a preponderance of the evidence:   (1) the defendant /debtor obtained money or property through a material misrepresentation he knew was false, or that he made with gross recklessness as to its truth; (2) the defendant/debtor  intended to deceive the credit card company; (3) the credit card company justifiably relied on the false representations; and (4) the credit card company’s reliance was the proximate cause of its loss.  See Grogan v. Garner, 498 U.S. 279 (1991); Longo v. McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir. 1993).

In a case premised on credit card transactions, “the representation made by the cardholder … is not that he has an ability to repay the debt; it is that he has an intention to repay.” Rembert v. AT&T Universal Card Services, Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 2003). Courts review the totality of the circumstances to determine, as a matter of fact, whether a debtor subjectively intended to repay the debt when he incurred it.

A Michigan bankruptcy court recently considered these issues in FIA Card Services v. Vernon May (In re May) and found that the plaintiff credit card company failed to meet its burden.  In other words, there was insufficient evidence that the debtor materially misrepresented his intention to repay, and the debt therefore could be discharged.  Some the facts considered by the court in reaching this conclusion included:  the debtor experienced an unexpectedly long period of disability; the debtor consistently made the minimum payments on the account and earned a favorable credit rating; and the debtor did not purchase luxury items or otherwise live lavishly. Instead, he purchased mainly for necessities.

The credit card company argued that fraudulent intent could be inferred because the debtor took out cash advances, using part of the cash to repay prior credit card balances.  The bankruptcy court rejected this argument:  “The evidence admitted at trial does not support any finding of “kiting” or a “Ponzi” scheme, contrary to [the credit card company's] unwarranted suggestion in its closing brief. Rather, it appears that a relatively unsophisticated borrower used assets (fungible loan proceeds) to pay expenses that he regarded as payment priorities….”

The In re May opinion offers some insight into how bankruptcy courts will analyze credit card discharge challenges.  However, every case is unique.  If you have already filed bankruptcy and been served with a credit card company’s adversary proceeding,  or are considering bankruptcy and fear that one or more of your debts may be challenged, talk to an experienced bankruptcy attorney in your jurisdiction.

-Drew Broaddus