Nearly all of the individuals who visit our office have concerns about credit card debt.  While this type of debt can typically be wiped away or discharged through a chapter 7 bankruptcy, it is important to tread with caution. Credit card issuers sometimes challenge the Discharge of their debt in Bankruptcy by filing an adversay proceeding, claiming that the debt was incurred by fraud and therefore should be excluded from the discharge under §523(a)(2) .  This is sometimes called a “non-dischargeability action.”  Credit card debt may be non dischargeable in bankruptcy under either of two legal theories:  (1) The application submitted to get the card was fraudulent, or (2) the card was used without an intent to repay; this is far more common.  This issue used to arise only in Chapter 7 prior to the 2005 Bankruptcy Code amendments. Now, creditors can contest the discharge of debts in a Chapter 13 as well based on a Claim of fraud.

While each card issuer has a different practice about non dischargeability actions, each of the following circumstances probably increase the likelihood that the debt may be subject to challenge by the creditor:  an increase in credit card usage shortly before filing, a newly issued card, any large cash advances in months before filing, use of card for  recent travel or vacations, a pattern of borrowing on one card to make payments on others, exceeding credit limit, using card when unemployed or without reasonable belief that the debt can be repaid, the fact that the Debtor may be carrying a large balance at filing, or the existence of charges made after consulting bankruptcy lawyer.

Generally, the longer the length of time between any particular use and the bankruptcy filing, the less likely the usage will trigger a challenge to dischargeability.  A Complaint for dischargeability based on fraudulent use of the card may seek non dischargeability for certain of the charges, not necessarily the entire balance.

If you are concerned about a challenge by a credit card issuer to the discharge of a particular debt, there are several strategies available which should be discussed with a bankruptcy lawyer.  These include waiting to file bankruptcy so as to put more time and/or more payments on the account between the questionable usage and filing bankruptcy; settling with any objecting creditor if and when they file a non dischargeability action; or contesting the suit at trial.

-Drew Broaddus