If a debtor has recently run up a credit card account, will the bank seek to have its debt excepted from discharge? How much debt and over what sort of time period might cause a bank to file an exception-to-discharge lawsuit in the bankruptcy case?
One review of discharge exception lawsuits filed by one bank in particular would suggest that charges and cash advances of $4,000 or more incurred during the five months prior to filing could provoke a lawsuit.
Section 523(a)(2)(A) of the bankruptcy code allows a creditor to seek to have their claim excepted from discharge if it was incurred on the basis of false pretenses, false representation or actual fraud. The argument credit card banks will make when debtors run up an account, then file, is as follows:
1) Every time a card holder charges on an account, they are making a new "representation" that they intend to repay the debt;
2) A debtor who charges on an account shortly before filing bankruptcy knows, or should know, that they can't repay the debt and
3) it is possible that a debtor who charges on an account and then files right after, knew he or she was going to file bankruptcy and, therefore, intentionally defrauded the creditor.
A creditor that wishes its claim to be excepted from bankruptcy on these grounds must file a bankruptcy lawsuit (called an adversary proceeding) about three months after the bankruptcy is filed (the exact deadline is printed on the notice sent out by the Court Clerk when a case is filed.) This is not an inexpensive proposition; a bank must retain a lawyer to file the action. The filing fee alone is $293.
It is particularly expensive for national banks to operate an exception-to-discharge process. They need to monitor hundreds of bankruptcy judges around the country, to see which are more sympathetic to this argument than others. They need a network of attorneys who can represent them in bankruptcy courts all across the country. Local banks or credit unions have an easier time of it. Their customer base is usually located in just one or two bankruptcy courts; they would only need one law office to represent them, and they probably have a good idea of the judicial philosophy of their local judges regarding this issue.
So one question I always ask a new client is whether they have been using credit cards in the recent past. If they have not used any cards in the past year, they should be safe from this argument. But what if they have had recent credit card activity? My next question is who the credit card bank is; as mentioned above, local banks or credit unions will usually monitor this activity much more closely than national banks. And among the national banks, we in the Western District of New York see some banks bring these actions regularly, others not at all. An experienced bankruptcy attorney should be able to recognize which banks are most likely to bring this action.
I recently reviewed the actual lawsuit complaints filed by a national bank in our court in the past two years. There were five lawsuits filed, three in 2012 alone. The law firm filing the cases was from New York City (which, for our out-of-town readers, is over three hundred miles from Rochester). The complaint documents all had exactly the same format, indicating that the lawyer simply drops in the specific information about an individual case into a standard template. I think this sample shows the type of situations that may cause a national bank to look more closely at a potential exception-to-discharge lawsuit:
Case #1 (Buffalo): Case filed Jan. 26, 2011
Balance of account upon filing: $7,842.03
Between Nov. 28 and Jan. 23, debtor had $530 in charges and $5,090 in cash advances.
Total charges and cash advances: $5,630 within two months of filing.
Case #2 (Buffalo): Case filed Dec. 23, 2011
Balance of account upon filing: $12,237.01
Between August 2 and September 21, debtor had $11,408 in cash advances, all within four and a half months of filing.
Case #3 (Buffalo): Case filed January 12, 2012
Balance of account upon filing: $11,983.44
Between August 11 and Oct. 28, debtor had $3,970 in retail charges, all within five months of filing.
Case #4 (Rochester): Case filed March 7, 2012
Balance of account upon filing: $14,678.38
Between November 12 and December 13, debtor had $2,198 in retail charges and $2,000 in cash advances.
Total charges and cash advances: $4,198 within four months of filing.
Case #5 (Rochester): Case filed May 14, 2012
Balance of account upon filing: $10,043.14
Between Dec. 14 and Feb. 23, debtor had $10,036 in retail charges, all within five months of filing.
This analysis shows that, at least for one national bank active in this area, an exception-to-discharge complaint may be filed if a debtor has $4,000 in charges and cash advances within five months of filing bankruptcy (case #3, above). My analysis does not show the outcome of these cases; in general these cases are resolved by settlement and rarely go to trial. The point is that if a bankruptcy case is filed within the time frame of recent credit card activity, there is a strong possibility that the debtor may be facing litigation after the case is filed.
If you have had recent credit card activity and are thinking of filing a bankruptcy in Rochester NY, you need the services of an experienced bankruptcy attorney who can recognize this issue and provide you with expert advise as to your options. You may contact me for a phone consultation, at no charge, for more information about filing bankruptcy if you have had recent credit card activity.