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Smart Timing with the Presumptions of Fraud

October 5th, 2020 at 7:00 am

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:

  1. the bankruptcy case includes recent or ongoing debts or not
  2. you have to pay an income tax in full, in part, or not at all
  3. you must pay interest and or penalties on an income tax because of a tax lien
  4. you can discharge (legally write off) a credit card debt, or a portion of it
  5. you can discharge a student loan debt
  6. you qualify for a vehicle loan cramdown—reducing monthly payments, interest rate, and total debt—and still keep the vehicle
  7. you qualify for a personal property collateral cramdown—paying less—and still keep the collateral
  8. you stop the repossession of your vehicle in time, or lose it to the vehicle loan creditor
  9. you prevent the foreclosure of your home in time, enabling you to catch up over time
  10. you get more time to sell your home, including possibly years more
  11. you qualify for a Chapter 7 case under the “means test,” or instead must file under Chapter 13
  12. you qualify for a 3-year Chapter 13 payment plan or instead must pay for 5 years
  13. your sale or gifting an asset is a “fraudulent transfer
  14. your payment to a friendly creditor is a “preference” and must be returned
  15. 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.

What “Fraud”?

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.

 

Timing: Writing Off Recent Credit Card Debt

September 25th, 2017 at 7:00 am

Using a credit card shortly before filing bankruptcy doesn’t seem right. The law agrees. Writing off this kind of debt can be a problem. 


Our last blog post was about writing off—“discharging”—income taxes.  The conditions you have to meet to discharge a tax debt are mostly very clear. These conditions are based on rather straightforward calculations of time. If you don’t meet those time-based conditions the tax does not get discharged; you still owe it.

Credit card debts are completely different. First, they’re almost always discharged. Second, there are some timing rules but those rules don’t necessarily decide whether or not the credit card debt is discharged or not. We’ll explain all this in today’s blog post.

The Point of the Timing Rules

With income tax debts, they’re NOT discharged unless you meet the timing rules. With credit card debts they ARE discharged unless you meet the timing rules.

With income taxes the debt is not discharged unless it’s been long enough since the pertinent tax return was due and since that tax return was actually submitted to the IRS/state. The point of the rules is the give the IRS/state a chunk of time to try to collect the tax.

With credit cards the debt is discharged unless it’s been too short of a time since the credit card charge. The point of the rules is to make it harder to discharge a charge incurred after deciding to file bankruptcy.

A Mere Presumption

As we just said, the timing rules with credit cards merely make it harder to discharge a credit card debt.  If you run afoul of the timing rules with income taxes, you absolutely still owe the tax. With credit cards, if you run afoul of the timing rule there’s only a bigger chance that you would owe it. It just gives the creditor an easier time of making you pay it—a presumption that it can’t be discharged. But that creditor still needs to act or else it loses that advantage. The entire credit card debt could still get discharged.

For example, if you owed $7,500 on a credit card, of which you incurred $1,000 recently, the entire debt would be discharged in bankruptcy if the creditor did not timely object.

 Only a Portion of the Credit Card Debt is at Risk

With income taxes the entire tax is either discharged or it’s not. With credit card debts, most of the debt could be discharged while only the portion that violates the timing rules is not.

In the above example, only the $1,000 incurred recently, in violation of the timing rules, would usually be at risk of not being discharged.

In Rare Circumstances the Entire Credit Card Debt Could Be at Risk

The following may be confusing in light of what we said so far. If a creditor has evidence that you incurred the entire credit card debt without the intent to pay it, the creditor can challenge the discharge of the entire debt. The timing rules do not need to apply (although if they would that may make the creditor’s argument easier).

In the above example, if the creditor somehow had evidence that you didn’t intend to repay any of the $7,500 at the time you incurred the debt, the creditor could object to any of the $7,500 debt being discharged. It doesn’t matter how long ago that $7,500 debt was incurred.

The Timing Rules

So here are the timing rules.

If you buy more than $675 in “luxury goods or services” (essentially, any non-necessity) from any single creditor during the 90-day period before your bankruptcy is filed, that specific debt is presumed not to be discharged. Also, if you make a cash advance of more than $950 from any single creditor during the 70-day period before your bankruptcy is filed, the debt from that cash advance is presumed not to be discharged.  See Section 523(a)(2)(C) of the U.S. Bankruptcy Code.

The Presumption Is Only a Presumption

Just because a purchase/cash advance meets these conditions do not necessarily mean you can’t discharge that part of the debt. You can defeat the presumption with evidence that you did actually intend to pay the debt when you incurred it. You can still win by persuading the court of your honest intent. You and your bankruptcy lawyer can do this through your own testimony. You can also provide evidence of other relevant facts, such as of you making payments after incurring the debt, or the subsequent event(s) in your life that induced you to file bankruptcy (and not pay the debt after all).

New Thresholds for a “Luxury” Purchase or Cash Advance to Be Presumed Fraudulent

February 29th, 2016 at 8:00 am

Creditors will be a little less likely to challenge the writing off of recent uses of credit.


As of April 1, 2016 creditors will have slightly harder time showing that recent credit purchases or cash advances were fraudulent and so can’t be written off (“discharged”) in bankruptcy. That’s because to qualify for a “presumption of fraud,” creditors will need to have a higher dollar amount threshold before that presumption kicks in. The “presumption of fraud” makes it easier for a creditor to object to the discharge of a debt. With the new higher threshold, the “presumption” will not kick in quite as often, to the benefit of consumers filing bankruptcy.

If you’ve made credit purchases or cash advances in the last few months and are considering bankruptcy, this may benefit you.

Discharge of Debts in Bankruptcy

When you file bankruptcy most kinds of debts are discharged so that you never have to pay them. But certain select debts are never discharged—such as past-due child support. And some kinds of debts are discharged unless the creditor objects to the discharge and persuades the bankruptcy court that certain conditions are met so that discharge is not legally appropriate.

Debts of this last kind—that may be objected to—include those allegedly incurred through fraud or misrepresentation. Among those are recent ‘luxury’ purchases and cash advances. Under certain circumstances the Bankruptcy Code says those “are presumed to be nondischargeable.” How does this “presumption” work, and how could the upcoming adjustments in the law help you?

The Fraud Exception to the Discharge of Your Debts

One of the principles of bankruptcy is that you can’t purposely cheat a creditor in the incurring of a debt and then later discharge that debt through bankruptcy. Specifically, a creditor can challenge your ability to write off a particular debt if it was “obtained by… “false pretenses, false representation, or actual fraud… .” See Section 523(a)(2) of the Bankruptcy Code.

What’s a “Presumption”?

As mentioned above, a creditor has to object to the discharge of a debt that it thinks you incurred fraudulently, or else that debt will be still be discharged. In its objection the creditor normally has to provide evidence to the court proving your alleged fraud or misrepresentation. A presumption of fraud allows the creditor’s objection to go forward even without direct evidence of fraud. All it needs to show that certain circumstances arise that give rise to a “presumption” that you’ve committed fraud in how you incurred the debt.

The two sets of circumstances in which a presumption of fraud arises are with purchases of “luxury goods or services” and with cash advances, both occurring within a certain amount of time before the filing of your bankruptcy case.

The “Luxury Goods or Services” Presumption

Before April 1, 2016 if a consumer buys more than $650 in “luxury goods or services” in the 90 days before filing the bankruptcy, that debt is presumed not to be dischargeable. That means that the creditor may not need to provide direct evidence that the debtor did not intend to pay the debt at the time the purchase.

The rationale behind this presumption is that there is a sensible chance that within that short of a time before filing bankruptcy most debtors would either know that he or she intended to file bankruptcy, or would be considering doing so. If so, then at the time of purchase there is a greater likelihood the debtor did not have the intention to pay the debt arising from that purchase.

This presumption only applies to the purchase of “luxury goods or services.” But the meaning of this phrase is much broader than it sounds. It includes everything except goods or services “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.”

As of April 1 the $650 threshold of “luxury goods and services” purchased within the 90 days before filing is increasing from $650 to $675. That means that you can make slightly more in purchases during this time period before the presumption kicks in. So this advantage for creditors is being narrowed a little. (See Section 523(a)(2)(C)(i)(I).)

The Cash Advances Presumption

Similarly, if a consumer incurs a debt of more than $925 ($950 starting April 1) through one or more cash advances made in the 70 days before filing the bankruptcy, then that debt is presumed not to be dischargeable. Again, that means that the creditor may not need to prove through evidence that the debtor did not intend to pay the debt at the time the cash advance. (See Section 523(a)(2)(C)(i)(II).)

The Presumption Can Be “Rebutted”

We are saying that the creditor MAY not need to prove fraud because that occurs only if you don’t respond by “rebutting that presumption.” Once the creditor “raises the presumption” by alleging the necessary facts to fit within the presumption, you can force the creditor to back up the presumption with evidence. The creditor can win with only the presumption of fraud if you don’t push back. But with the right facts you can defeat the presumption and not have to pay the debt.

 Assume, for example, that you made a cash advance of more than $925/$950 within the 70 day period before filing bankruptcy, and the creditor objects to the bankruptcy court. If you in fact did intend to pay the debt at the time you made the purchase, you would respond to the court about your honest intent. You and your attorney would do this through your own direct testimony about your intent and/or by establishing other relevant facts, such as what happened in your financial life after you made the cash advance which then drove you to file bankruptcy and seek to discharge that debt.

A Creditor Can Bring Evidence of Fraud without a Presumption

On the other hand, a creditor can object to the discharge of a debt on grounds that you didn’t intend to pay it at the time of the purchase or cash advance or some other kind of fraud, and do so without the presumptions. For example, a creditor could object to the discharge of a debt that was incurred through a misrepresentation, such as with a credit application that greatly exaggerates a debtor’s income or assets, a year or two before the bankruptcy filing.

A presumption helps a creditor in the circumstances where they apply. But if a presumption doesn’t apply, the creditor could still potentially challenge your ability to discharge that debt. The creditor would have to give the court strong evidence that you did not intend to pay the debt, which is usually not easy to come up with. That’s why creditors are not as likely to challenge purchases and cash advances that were made outside the presumption periods.

Avoiding These Presumptions of Fraud

You can avoid giving a creditor the advantage of these presumptions. First, you can avoid using any credit and making cash advances in the few months before filing bankruptcy. And, second, if you’ve already incurred made such purchases and/or cash advances you could just hold off on filing bankruptcy until enough time has passed to get beyond these 70 and 90-day presumption periods.

Remember again that if a creditor thinks it has evidence that you incurred a debt that at that time you did not intend to pay, or that there was some other kind of fraud or misrepresentation, the creditor may still decide to raise the issue without the benefit of a presumption. But if you avoid filing within the 70/90-day presumption periods you will decrease the chance that a creditor will challenge the discharge of its debt. 

 

Bankruptcy Timing and the Holidays: The “Cash Advances” Presumption of Fraud

December 14th, 2015 at 2:00 am

If you can, don’t do cash advances during the holidays if you’re contemplating filing bankruptcy. If you do, understand the rules about them.

 

In our last blog post we explained the “luxury” presumption of fraud. This provision in bankruptcy law increases the risk that you would not be able to “discharge” (legally write off) a very particular kind of debt. That kind of debt would be one that resulted from a purchase or a set of purchases totaling more than $650 made during the 90 days before filing bankruptcy.

The “cash advances” presumption of fraud is closely related to the “luxury” one. The dollar amounts and timeframe are just a little different. This “cash advances” presumption increases the risk that you would have to pay a debt tied to a cash advance or set of cash advances totaling more than $925 made during the 70 days before filing bankruptcy. (Notice that for this presumption to kick in, you incur somewhat more credit in a somewhat shorter period of time than with the “luxury” presumption of fraud.)

The Risk of Doing Cash Advances Shortly Before Filing Bankruptcy

We keep talking about the increased risk of not discharging a debt. What do we mean by this?

We mean that you could very well still discharge a debt from a cash advance done within the 70 days and more than $925. There’s just a greater risk that you couldn’t. Let us explain.

First, if you happen to do a cash advance of more than $925 (or a series of them with the same creditor) within the 70 days before filing bankruptcy, you may not have to pay that debt. That’s because you will not have to pay it unless a creditor complains about it, and does so within a deadline which is about 100 days after your bankruptcy case is filed. If you list the creditor in your bankruptcy case and it doesn’t complain within the deadline, that cash advance debt would simply be written off.

Second, the creditor may file a formal complaint and do so on time but that doesn’t mean it will win. A cash advance within the 70 days and exceeding $925 only creates a presumption that you didn’t intend to pay that debt. That presumed intent can be defeated by evidence showing that you did actually intend to pay it at the time you did the cash advance(s).

Third, you can avoid this “cash advance” presumption altogether by simply waiting to file your bankruptcy case until at least 71 days after the (latest) cash advance.  Then the creditor gets no presumption of fraud and actually has to come up with evidence that you didn’t intend to pay the cash advance debt. Without some evidence it can’t file a complaint (although the evidence could be circumstantial, such as you not making any payments on the account after the cash advance indicating lack of intent to pay it).

The Risk of Doing Cash Advances More than 70 Days before Filing Bankruptcy

Even a cash advance done outside the 70-day presumption period comes with some risk that this cash advance debt would have to be paid. The creditor just has to have evidence that you didn’t intend to pay the debt, no matter when the debt was incurred.

Two Practical Truths about the Advantage of Presumptions of Fraud

Beyond anything written in the law, here’s why the “cash advance” presumption of fraud (and the “luxury” one as well) works in favor of creditors:

1) The presumptions allow creditors to win without any evidence of fraud in cases where the debtors don’t respond to the creditors’ complaint. Because debtors who file bankruptcy not represented by an attorney are much more likely to not respond, some creditors are more inclined to file these complaints in those unrepresented cases. When the debtor does not respond on time, the creditor gets a judgment by default against the debtor.

2) When a debtor does respond (generally through his or her attorney) to a creditor’s complaint, the matter is often settled with the creditor getting paid at least something out of the cash advance at issue. That’s because the high cost in attorney time compared to the relatively small amounts usually at issue often makes fighting the complaint much more expensive than just quickly settling it.

Because of these two practicalities, the presumptions of fraud gives creditors more motivation to file complaints whenever there is a cash advance exceeding $925 during the 70 days before a bankruptcy filing, even without much indication that the debtor didn’t intend to pay that debt at the time.

The Bottom Line

The presumption only gives a modest legal leg up. But the practical advantage is significant. So whenever possible it’s usually worth waiting to file your bankruptcy case until after the 70-day “cash advance” presumption of fraud period (and the 90-day “luxury” one as well) has passed.

 

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