The topic on non-luxurious vs luxurious items, fraud and the use of credit

[EandGWZ]

I know the law but I wanted to put this out to the board for comment. You want a problem free discharge than I encourage you to strongly follow this bit of advice.

My recommendation is to cut up and stop using your credit cards the minute you retain your bankruptcy attorney, at the very least the moment you make your first payment for services. Barring 10k charges for Hawaiian vacation, it virtually eliminates a creditors ability to demonstrate fraud or any attempt for an adversarial proceeding. The act of paying an attorney suggests to me that you have come to the conclusion that you are unable to pay your debts back. It follows that any purchase thereafter is fraudulent, that is, you have made a purchase without any intention of paying it back. I don't care what the law says but that's fraud.

Now I am not getting on anyone who doesn't think this is good advice, I understand there are people out there who mere survival depends on the use of their credit cards. Each person's situation is unique so I am not judging anyone. Just thought I'd put it out there.

I'm interested is understanding or hearing from those who think otherwise, that is, why should you be able to continue to use your credit cards (even for gas or groceries) knowing you'll never pay it back? How is that different from let's say taking someone's money to invest without any intention of returning it. In justifying your response I want you to consider moral and ethical implications, replace the citbank, amex, chase with Joe or Sally Smith.

Heah, I'll be the first to encourage you to "stick it to them" and use any advantage under the law especially if you are starving or your children are suffering. I just think bankruptcy has personal implications which need to be considered in order to avoid having to go through the pain of being in debt again.

[despritfreya]

Unfortunately your analysis is not exactly on target. Certainly use of a credit card after you meet with a bk attny plays well in the hands of a creditor and any 523(a)(2)(A) claim is a slam dunk. However, the analysis of whether or not the use of the card in the months leading up to the filing of the bk is fraudulent is a bit more complex. As a general rule, the moment one realizes they simply do not have the financial ability to repay the debt the use of the card should end. Use after such a realization means that one may not have the intent to repay and therefore the use is fraudulent.

The following case describes how requisite intent is determined. The case after it shows how one judge applied “intent” to a particular set of facts:

In re McKinnon, 192 B.R. 768 (Bankr. N.D. Ala., 1996)

“the theories for determining the requisite intent for non-dischargeability of credit card debt under section 523(a)(2)(A) are as follows:

1) The implied representation theory finds false intent by the mere use of a credit card. Thus, this theory presupposes the existence of the debtor's representation of intent and ability to pay. This relieves creditors of one of the burdens of proof for fraud. Implied fraud is not a basis for non-dischargeability actions because actual fraud is required for a determination of non-dischargeability.

2) The assumption of the risk theory finds false intent only where authority to use the credit card has been revoked. This theory places the creditor in an intolerable position with reference to pre-revocation charges wherein the debt is deemed non-dischargeable only where the cardholder continues to use the card after receiving notice of the issuer\'s revocation of the card.

3) Under the totality of the circumstances theory the creditor is required to prove the cardholder\'s intent to deceive by the examination of a list of objective factors. However, the reasonable man test is not conclusive on the question of common law fraud, but only evidence from which lack of honest intent may be inferred.

4) The common law test or subjective theory requires a court to determine whether the cardholder subjectively intended to deceive the issuer at the time the charges were incurred by examining all of the facts on a case by case basis.”


American Express Bank, FSB v. Nor See - Bankr. E.D. Cal., 2012 - not published - Bk filed November 30, 2010. Creditor seeks denial of discharge for charges run up between April 23, 2010 to August 24, 2010.

Here, the Plaintiff seeks a determination that the Debtor's use of the Credit Card. . . in the months leading up to the bankruptcy, was done under false pretenses. The Plaintiff contends that those charges were made with fraudulent intent and should be excepted from the Debtor's chapter 7 discharge. None of the transactions at issue here fall within the presumption periods prescribed in § 523(a)(2)(C). . .

When the debt at issue arises from the use of a credit card, the first, fourth and fifth elements of the fraud claim are generally straightforward. Courts accept the premise that the debtor's use of a credit card constitutes a representation to the creditor of the debtor's intent to repay the debt. . . A creditor's reliance on the debtor's representation need only be justifiable, not reasonable, to except a debt from discharge under § 523(a)(2)(A). Unless the debtor's credit card history is marked by "red flags," the creditor can establish reliance on the debtor's promise to pay the debt by simply showing that the debtor paid his or her credit card debts in the past. . . The finding of damages is supported by the fact that the debt was not repaid and subject to potential discharge in the bankruptcy proceeding.

In a "credit card" dischargeability case, the issues shift away from the actual representation and focus more on the debtor's state of mind: knowledge that the representation was false and intent to defraud. . .

(W)hen the Debtor used or consented to the use of his Credit Card, he made a representation to the Plaintiff that he intended to repay the debt. The court is persuaded that the Plaintiff relied on that representation when it paid for the charges made to the Credit Card and it has been damaged by the Debtor's failure to pay the debt. The remaining questions then are, did the Debtor know he couldn't pay for the charges made to the Credit Card and did he make the representation of payment with the intent to deceive?

The central inquiry in determining whether there was a fraudulent representation is whether the card holder lacked an intent to repay at the time he made the charge. Since a debtor will rarely admit to his fraudulent intentions, the creditor must rely on the twelve factors in Dougherty and any other available objective factors to establish the subjective intent of the debtor through circumstantial evidence. Viewing each Credit Card transaction as a separate unilateral contract, the court must first separate those transactions which appear to be "normal" and within the contemplated usage of the credit card from those which appear to be unusual or extraordinary.

Here, almost all of the charges made to the Credit Card during the relevant period appear to be normal purchases within the credit limit of the Credit Card. The Debtor made, or substantially made, the minimum monthly payment due on the Credit Card each month which suggests that the Debtor fully intended to perform the Credit Card agreement, at least with regard to the "normal" usage transactions. Of particular importance is the fact that the Debtor stopped using the Credit Card altogether approximately three months before the bankruptcy was filed, which shows that the Debtor had no intention of "loading up" the Credit Card account in anticipation of the bankruptcy filing.

As to the Debtor's "normal" usage of the Credit Card, the court is not persuaded that the Debtor acted with fraudulent intent.

That said, it is clear from the evidence that not all of the charges made to the Credit Card were "normal." Specifically, the court is referring to the two extraordinary and unexplainable credit transactions with Michael Automotive in the amount of $15,500. Based on the facts that these charges far exceeded the credit limit on the Credit Card, and all the charges appear to have been made for the benefit of someone else, at a time when the Debtor had no apparent way to ever repay these charges, the court is satisfied that the Debtor made these charges with the full expectation, or certainly the understanding, that they could and would never be repaid. If the Debtor made these charges knowing that they would never be repaid, then he made them under false pretenses with the intent to defraud the Plaintiff. If the Debtor made these charges without considering the repayment issue, then he acted with a reckless disregard for the truth. A reckless disregard for the truth regarding the intent to repay a debt satisfies the "intentional misrepresentation" element of the fraud claim. . . Either way, the court is satisfied that the Debtor's use of the Credit Card to make these extraordinary charges within a two-day period rises to the level of actual fraud within the meaning of § 523(a)(2)(A).

A similar analysis applies to the six airplane tickets purchased with the Credit Card in May 2010. The total amount of these tickets, $2,365.80, was still well within the credit limit of the Credit Card, but the court can infer from the totality of the circumstances that the cost of these tickets could and would never be repaid. The court is not persuaded that the Debtor purchased the airplane tickets with actual fraudulent intent, but it does appear that he purchased the tickets with a reckless disregard for the truth that he would not pay for them.

Conclusion.

Based on the foregoing, the court is persuaded that the Debtor knew, at the time the Credit Card was used to make the payments to Michael Automotive ($15,500), that those charges could never be repaid in light of the Debtor's circumstances, including the Debtor's current financial situation. Accordingly, those charges were made with a subjective intent to defraud the Plaintiff and shall be nondischargeable under § 523(a)(2)(A). The court is also persuaded that the Debtor used the Credit Card to purchase the six airplane tickets ($2,365.80) with reckless disregard for the truth of the fact that the debt could never be repaid. Accordingly, the airplane tickets are also nondischargeable.

As to the remainder of the charges reflected in the monthly billing statements, the court is not persuaded that those charges were made with the subject intent to defraud the Plaintiff. The Plaintiff's Motion for entry of a default judgment will be GRANTED in part. The Plaintiff shall submit a proposed judgment consistent with this memorandum decision. Plaintiff shall recover its costs and reasonable attorney's fees.

___________________

So, while difficult, the best course of action is to stop the use of the card the moment you realize you do not have the ability to pay.

Des.

[EandGWZ]

Thank you Des. I appreciated your response. I wonder what would happen if a creditor showed up at a 341 meeting and ask the debtor, "when did you first contact your bankruptcy attorney?" I don't think it would meet the muster of the law as evidence for fraud but it would be quite difficult to explain to a judge or jury how you planned on paying for purchases after you had decided to file for bankruptcy (inherit conclusion of retaining an attorney's services).

[sailing2013]

I was reading somewhere on the 'net that a common questions Trustees ask at 341 Meetings are:

1) When did you first consider filing BK?

2) When did you realize you were going to file BK?

3) When did you first contact an BK atty?

Note, EandG, these questions are asked by the Trustee, not the creditors. And must be answered under oath.

I reckon if you had contacted an attorney, then went on a shopping spree, regardless of how much time had passed before filing, you'd receive suspicious looks!

[LadyInTheRed]

2) When did you realize you were going to file BK?

3) When did you first contact an BK atty?

I wasn't asked either of those. I also don't think those are questions that people here often say are asked. But, I am sure those questions would come up if a creditor did object to the discharge of a debt.

[btbeme]

Karma says that you should not charge if you do not intend or have the means to pay it back. And, if you are asked to explain certain things at your 341, it will be kinda warm and itchy in that room. The courts are packed daily with people trying to prove or disprove intent. Whether they win or lose, there really is only one person who knows what the true intent was at the time.

So I suggest that the easiest path is to not go there. It might hurt at the moment, but the rest of the memory is pain-free. And it keeps you on the right side of both karma and the strictest interpretation of the law.

Certainly, the moment you retain an attorney for filing a BK is the last opportunity to realize that you are bankrupt and have no means to pay back your debts. I am guessing there may have been a moment or two before then that the realization may have hit.

But, hey, some folks like to ride the big surf.

[frogger]

Heah, I'll be the first to encourage you to "stick it to them" .

Wow! And "them", may be us............

Karma.

[keepmine]

I was reading somewhere on the 'net that a common questions Trustees ask at 341 Meetings are:

1) When did you first consider filing BK?

2) When did you realize you were going to file BK?

3) When did you first contact an BK atty?

Note, EandG, these questions are asked by the Trustee, not the creditors. And must be answered under oath.

I reckon if you had contacted an attorney, then went on a shopping spree, regardless of how much time had passed before filing, you'd receive suspicious looks!

Don't know where you read that but, those types of questions aren't typically asked at a 341. Those would be more in line at an adverserial proceeding.

[sailing2013]

Here is a link the US Dept of Justice's Chapter 7 Trustee Handbook.

http://www.justice.gov/ust/eo/private_trustee/library/chapter07/docs/ch7_handbook/ch7_handbook_2011.pdf

The questions I posted are drawn from it.

Now, I recognize manuals are not always followed; but, since this is coming directly from the DOJ to Chapter 7 Trustees, I reckon it might carry some weight.

[kornellred]

There are basically two types of debtors who file for Chapter 7 bankruptcy. The first type, which I would assume are the numerically prevalent type, are debtors who have been handling their unsecured debt loads without too much of a problem, and then encounter devastating circumstances in their lives, such as divorce, serious illness, loss of employment, and the like. They may have to use credit to some extent in order to manage their daily affairs, even thought they can detect the inevitability of bankruptcy. They are making a fully conscious decision to spend a creditor's money, knowing that they will not be required to pay it back.

The other type of debtor who files (if they qualify) for Chapter 7 bankruptcy is the profligate spender who knows that bankruptcy will eventually become inevitable. These debtors know far in advance that they will eventually file. They continue to utilize credit until the situation becomes untenable. That is pretty much in-your-face fraud.

Everybody knows this. The only way that creditors can charge a debtor with fraud is if they can actually prove it in a court of law. You have to be pretty ignorant to leave an obvious paper trail describing spending patterns.

When you file for bankruptcy, you are not fooling anybody. Except, maybe, yourself.

[justbroke]

I was reading somewhere on the 'net that a common questions Trustees ask at 341 Meetings are:

1) When did you first consider filing BK?

2) When did you realize you were going to file BK?

3) When did you first contact an BK atty?

The questions I posted are drawn from it.

On what page did you draw these questions from? They are not in the Appendix which lists the "standard" Trustee questions. Regardless, the questions you posted are not typical questions at all; and I have sat through several 341 Meetings (two myself) and have never heard them.

[Pjmax]

I think the only only question I was asked that's even close, was: 'When was the last time you used your credit cards?' I remember the TT looked very surprised when I answered 'about 3 years ago.' Don't know exactly what to make of that, I didn't ask, and was trying to keep my answers to 'yes, sir' and 'no, sir.'

[bcohen]

I think the only only question I was asked that's even close, was: 'When was the last time you used your credit cards?' I remember the TT looked very surprised when I answered 'about 3 years ago.' Don't know exactly what to make of that, I didn't ask, and was trying to keep my answers to 'yes, sir' and 'no, sir.'

By the time I eventually file for bankruptcy later this year, it will have been more than 4 years since I last used my credit cards, and more than 3 and a half since my debts all charged off. I didn't make any "luxury purchases" in the time that I had the cards, and I very seriously doubt that the creditors and JDB's would bother trying to challenge discharge now.

[EandGWZ]

Wow! And "them", may be us............

Karma.

Touché! The consumer never wins against the bank. I was on the losing end of some long term loans with Chase. The specifics were pay 3% to originate and the loan would be 0% until I paid it off, basically my payment was the standard 2.5% of the loan every month. When Obama took office and past those laws they called me and said my new payment was 5% the balance and the APR would be 5.99%! When I told them that was more than I could handle they offered me another loan with 3% origination and 1.99% APR to pay off that loan...haha. That's how banks operate...in the end I had to get the comptroller of currency involved in the case. Although not as bad, I managed to keep my payments at 2.5% the balance subject to 2% APR.

The idea for this post was what I perceived as heavy reliance on the luxury vs. non luxury aspect of using credit up until the day of filing, that is, some individuals thinking that it is ok to use their card up until the time of filing as long as the purchases fall under everyday expenses. My position is to stop using the cards once you realize you won't be able to pay them back (for ethical and moral reasons) and to wait the 90 days to avoid unnecessary litigation. I do not condone nor encourage fraudulent use of credit.

[sailing2013]

Thomas Curry was involved in your case? Please do share! That must have been an epic case.