Understanding Bankruptcy 10/18/18

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Question: How to miss out on discharging credit-card debt.
Somewhere in our recent past, the holiday season became the shopping season.

Lots of people in financial trouble hang on through the holiday season before taking up bankruptcy as part of the New Year. (I haven’t seen many people give themselves a bankruptcy filing for Christmas, though, for many, it would be objectively the best thing under the tree.)

If bankruptcy may be in your future after the holidays, it pays to know how credit-card debt is treated in bankruptcy. Welcome to the short list of ways to miss out on discharging credit cards in bankruptcy.

In the typical bankruptcy, credit cards make up the largest part of the unsecured debt. The basic premise in bankruptcy is that unsecured debt is dischargeable unless it appears on the list of non-dischargeable debts in § 523(a). As the heading to the statute says, non-dischargeable debts are exceptions to the rule of dischargeability.

There are two basic ways to blow your chance to discharge the balance on your credit card in bankruptcy:
1. Lie on the credit application to get the credit;
2. Use the card fraudulently.

If credit was granted to you on the basis of a false application, there’s a risk that the entire balance on the account could be non-dischargeable. Suppose that you misstated your income, assets or employment status to look more credit-worthy. Those misstatements fall within the exception to discharge for debts created in reliance on a false statement in writing.

Practically, I’ve only seen this kind of challenge once in 31 years of bankruptcy practice. The card application was submitted within months of the bankruptcy filing and the entire picture of the applicant in the application was a fabrication.

I have my doubts that most card issuers can retrieve a copy of the application or are much exercised about proving up misstatements, when there’s another route to saving their claim from discharge.

Next Week’s Question: Another way to miss out on discharging credit-card debt.

Michael A. Cibik, Esquire

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