Discharging Credit Cards in Bankruptcy: Not Always a Sure Thing

Of all the debts discharged in bankruptcy, credit card debt may sting the most. According to the Department of Justice, some $20 billion in credit card debt is discharged annually in chapter 7 bankruptcy cases alone.ⁱ This is because credit cards are a mask for nearly any type of debt— they can easily consist of medical bills, living expenses, luxury purchases, or even gambling debts.

In addition to their prevalence in bankruptcy, credit card debts are notoriously hard to pursue—they are usually not the product of fraud or misuse. But in some cases, a creditor can collect a credit card during and after a bankruptcy case. ⁱⁱ That possibility turns largely on a single, important factor: whether the debtor intended to repay his or her charge. If that intent did not exist, a creditor will likely be able to collect it, bankruptcy or not.

Credit card debt, like any other normal debt, is generally presumed to be dischargeable— that is, the bankruptcy court will likely order it uncollectible by the end of the case.ⁱⁱⁱ Discharge, however, is not always a given. It is subject to challenge in circumstances of fraud and dishonesty. ^iv Here, it is the issue of fraud that is of particular interest.

Credit card debts, generally, are only collectible in bankruptcy if they were incurred fraudulently or if they were used excessively right before filing. ^v But the Sixth Circuit Court of Appeals—the highest court governing Ohio’s bankruptcies with exception to the U.S. Supreme Court—has held that some credit card debt is without protection if used fraudulently. ^vi Fraudulent use is determined by the borrower’s subjective^vii intent at the time a charge is made. This can be a double-edged sword.

Each time a credit card is used, the borrower represents to the creditor that he or she intends to repay the charge. ^viii The borrower’s ability to repay the creditor, however, is irrelevant.^ix Only when the borrower lacks the intent to repay will that debt be collectible in and after bankruptcy. Proof of that intent, however, is often difficult to find. But the Rembert case offers guidance.

Under Rembert, a financial institution must show the intent to repay did not exist when the borrower made a charge.^x Although each case is unique, courts will consider a common set of factors in their review. Key among them include, at the time of charge, the borrower’s financial condition, whether the borrower was employed, and whether the borrower had any employment prospects.xi Although the burden may be somewhat difficult, good record-keeping and borrower interaction may ultimately assist in recovering, even in the face of bankruptcy. A review of the Rembert case itself is illustrative.

In Rembert, a borrower’s debts included several credit cards. The cards’ balances came from significant cash advances to fund a gambling addiction. The borrower determined, albeit unreasonably, that the only way to get out of debt was through future gambling winnings. There were, of course, no winnings, and she filed for bankruptcy relief. The credit card holders sued her on the belief that she never intended to repay her gambling-based debts. Although the Rembert case formally recognized a new, powerful tool for Ohio’ financial institutions, the court held that tool inapplicable to the borrower in that case.

The creditors argued that the borrower neither had the intent nor the ability to pay her credit card debt when charged. They argued that it was unreasonable to rely on future gambling earnings to pay for cash advances. The court disagreed.

Initially, the court held that the borrower’s ability to repay her credit card debts was wholly irrelevant because credit cards, by their nature, are used when the borrower may not have the current ability to repay.^xii Secondly, it held that, however misplaced, the borrower actually had the subjective intent to repay her credit card debts with future gambling earnings. This was enough to protect the borrower and hold her credit card debt permanently uncollectible.

The borrower’s subjective “good intent” overpowered the objectively unreasonable basis for repayment. Underneath that ruling, however, is a collective win for Ohio’s financial institutions—they have the power to pursue credit card debt that is otherwise lost in bankruptcy when the facts are right and it can be established that the borrower had no subjective intent to repay.

Credit card debt is one of most common losses encountered by creditors in bankruptcy. In some circumstances, that loss is unavoidable. But in others, it is preventable through good recordkeeping, proper legal analysis, and keen issue spotting by legal counsel.

ⁱ Credit Card Debt in Chapter 7 Cases, Ed Flynn & Gordon Berman, Dept. of Justice.

ⁱⁱ Only available when the debt is ordered nondischargeable and the stay is terminated.

ⁱⁱⁱ 11 U.S.C. § 523(a)(2).

^iv See 11 U.S.C. §§ 523, 524, and 727.

^v See 11 U.S.C. § 523(a)(2)(C)(II) (cash advances in excess of $925 that were obtained within 70 days of bankruptcy filing).

^vi Rembert v. AT&T Universal Card Services (6th Cir., 1998), 141 F.3d 277.

^vii Subjective, in this context, means the individual borrower’s intent to repay.

^viii Rembert at 281.

^ix Rembert at 281.

^x Rembert at 282.

^xi Rembert at 282.

^xii Rembert at 281.

© 2013 Stultz & Stephan, Ltd.

This article is not a solicitation for business and is not intended to constitute legal advice on specific matters, create an attorney-client relationship, or be legally binding in any way.