The Basics: The Objection Most Often Made by Creditors to Try to Make You Pay a Debt

Most debts are written off—“discharged” in bankruptcy. But not “fraud” ones. Watch out for creditors’ use of the “presumption of fraud.”

 

When you file a bankruptcy, every creditor can consider objecting to its debt being discharged. They very seldom do. This is mostly because the legal grounds for them to object are quite narrow. Usually the facts simply don’t support an objection, so there’s no point for them to object. And no point for you to worry about it.

When a creditor does object, most often it involves accusations of fraud by the debtor in incurring the debt. That basically means lying for the purpose of getting the loan or other form of credit.

Because it’s difficult to prove a person’s bad intentions, the law gives the creditors some help. “Presumptions of fraud” refer to set of very specific circumstances within which the law “presumes” bad intentions by the debtor, making it easier for a creditor to succeed in its objection and make you pay all or part of a debt.

The Purpose of the “Fraud” Exception

The point of bankruptcy is to give relief to the honest debtor. So if you provided the creditor false information at the time you got the loan or used the credit, and the creditor reasonably relied on that information to give you the loan or credit, or if you intended to cheat the creditor at the time you got the loan or credit, a creditor could objection to the discharge of that debt.

The Purpose of a Presumption

A presumption that a debt not be discharged simply shifts the burden of proof from the creditor to the debtor. Without the presumption, a debt is discharged unless the creditor can convincingly show that the creditor intended to cheat the creditor. With the presumption, once a creditor simply establishes that the presumption applies, the debt is not discharged unless the debtor convincingly shows that it did not intend to cheat the creditor.

The Practical Effect of a Presumption

The practical effect is settlement leverage. In other words, the effect is to make it much more likely that you would have to pay something to the creditor once it raises an objection backed by a presumption of fraud.

Why is that? Because fighting a creditor’s dischargeability objection gets expensive very fast. Most cases are settled before going to trial because of the costs of battling it out in court. Once it’s clear that the facts show that the presumption applies, the odds go way up that you would not win at trial. Plus the creditor knows it’s often cheaper for you to settle than to fight, often even if you ultimately defeat the presumption and not have to pay the creditor anything!

The closely related practical effect is this: without an applicable presumption, a creditor is more hesitant to raise a nondischargeability objection, because it is harder for it to win in court, and because it knows the debtor is less likely to settle. It’s more likely to pay a lot in filing and attorney fees, and get nothing.

The Presumption for “Luxury Goods or Services”

The first of the two presumptions arises if a consumer incurs a debt exceeding $650 “for luxury goods or services” during the 90 days before filing bankruptcy (either a single purchase or a series of them during that period). The logic of this is that the person making the purchase during that period is considered either to have likely known he or she was going to file bankruptcy and was not going to pay the debt, or else to have been at least very reckless to be using credit that close to filing bankruptcy. Either way the law assumes that at the time the purchase was made the purchaser really didn’t intend to pay the creditor back.

Careful because “luxury goods or services” are not at all what they sound like they would be. The term is downright misleading. Congress has defined them to include any use of credit except those “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” If it’s not “necessary,” it’s a “luxury” for purposes of this presumption.

The Presumption for Cash Advances

The second presumption arises if a consumer incurs a debt exceeding $925 through a cash advance or advances made in the 70 days before filing the bankruptcy (either a single advance or a series of them during that period). The logic of this is the same as above: the person taking the cash advance during that period is considered either to have likely known he or she was going to file bankruptcy and was not going to pay the debt, or else to have been at least very reckless to be taking a cash advance that close to filing bankruptcy. Either way the law assumes that at the time of the cash advance the debtor really didn’t intend to pay the creditor back.

Remember, You CAN Fight a Presumption

If one of these two presumptions applies, that doesn’t necessarily mean that you’ll have to pay the debt. All you have to do is convince the judge that you did in fact intend to pay the debt back at the time of the “luxury” purchase or the cash advance. But as pointed out above, that can get prohibitively expensive. Better than your honest testimony about your good intention would be facts showing what happened between the short time that you incurred the debt and when you filed the bankruptcy case convincingly showing that you did not decide to file until AFTER incurring the debt. You generally need something quite concrete to convince the creditor that it won’t win even with the presumption in its favor.  

But Also Remember, a Creditor Does Not Need a Presumption

Just because “luxury goods” were purchased more than 90 days before your bankruptcy case is filed or cash advances were made more than 70 days before filing, so that the presumptions don’t apply, the creditor can still challenge your ability to discharge the debt. This tends to happen when the credit was incurred still a relatively short time before filing, and when the amounts involved are relatively large. It doesn’t help if the use of the credit does not pass the “smell test,” as in expensive vacation expenses. Although the presumptions wouldn’t apply, the creditor might still not have a hard time giving the court convincing evidence that you did not intend to pay the debt.

 

It goes without saying—but still needs to be said!—if you have any concerns that a creditor might object to the discharge of its debt, along the lines of these two presumptions of fraud or for any other reason, definitely raise them with your attorney during your first meeting, and preferably early in that meeting. There are ways to lessen the risk of such creditor objections, such as with the timing of your bankruptcy filing. Also, you may in fact have less to worry about than you fear. It’s human nature to feel more guilt than is warranted, and to assume the worst. Again, creditor objections to discharge are pretty unusual, and most of the time they don’t materialize. Find out what you need to know from your attorney. 

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