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The Fraud Exception to Discharge

by Adam Weiner

The bankruptcy statutes are designed to give honest debtors a fresh start.  They are not designed to allow individuals to discharge debts that they never intended on paying in the first place.  Most debtors are honest people that have come on some challenges (loss of job, medical condition, etc.).

Most debtors intended on repaying their debts (credit cards, medical, etc.) when they were incurred, but because of an unforeseen event like a loss of a job or medical condition, they are no longer able to pay on the debt.  Thus, Congress created the bankruptcy laws to allow individuals to put the past behind them and move forward.

Possibly the most important thing that the bankruptcy laws do is it helps clear the mind of the debtor and eliminates a substantial amount of anxiety and worry for the debtor.  This, in turn, will inevitably help the debtor be more productive.  And this is exactly what the bankruptcy laws are supposed to do.  But, under the Bankruptcy Code, you can’t purposely cheat a creditor and then obtain a discharge on that debt.  Specifically, a creditor can challenge the dischargeability of their debt if it was obtained by false pretenses, false representation, or actual fraud.

Presumptions of Fraud

There are two main “presumptions of fraud” in the bankruptcy code.  The presumptions of fraud make it easier for the creditor to challenge the dischargeability of their debt.  One presumption of fraud is if the debtor purchased on credit more than $500 of “luxury goods or services” within 90 days of filing a bankruptcy.  If the purchase was for goods or services that were reasonably necessary and the debtor could convince a judge of this, if necessary, then the debtor could defeat a challenge by the creditor based on this first presumption of fraud.

The second presumption of fraud is if the debtor incurred $750 or more of cash advances from a creditor within the 70 days before a bankruptcy filing.  If the debtor incurred more than $750 of cash advances within the 70 days before filing a bankruptcy and the creditor challenges the dischargeability of their debt based on this fact, then the evidentiary burden would be on the debtor to convince the judge that they intended to repay that creditor at the time that those cash advances were taken (i.e., the debtor had not already decided that they would be filing a bankruptcy).

A creditor could still challenge the dischargeability of their debt in a bankruptcy proceeding if neither of the above presumptions exist.  But it would be more difficult for the creditor to prove that the debtor intended to not repay them if one of the two presumptions do not exist.  In general, it is unlikely that creditors will formally challenge the dischargeability of their debt if one of the above presumptions does not exist.  It is important to discuss all relevant issues with your bankruptcy attorney, including, in the minimum, cash advances taken within six months of filing a bankruptcy and/or credit card charges within six months of filing that were not reasonably necessary.  As always, this information is not meant to give specific legal advice and it is highly recommended that you speak with an experienced bankruptcy attorney in Portland to discuss the specifics of your situation.  I am happy to meet with you and discuss your situation.

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