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Fraud Claims


1. General Rule. Any debt for money, property, services, or credit obtained by fraud or the use of a false financial statement, can not be discharged in any bankruptcy case (Chapter 7, 11 or 13). 11 U.S.C.
§ 523(a)(2).       Index

2. Fraud Defined. Fraud is generally defined as a misrepresentation (a lie) about an important fact which another person relies upon in deciding to enter into a transaction. A debt will be considered fraudulent if, at the time the debt was incurred, the debtor:

► did not intend to repay the debt (i.e. already decided not to pay);

► already formed an intention to file for bankruptcy; or

► did not have a reasonable possibility of repaying the debt (i.e. had an obvious inability to pay the debt).       Index

3. Fraud Presumption. The following debts are presumed to be fraudulent:

► Cash Advances. Cash advances exceeding $925 made within 70 days of a bankruptcy filing. Cash advances obtained from two or more different creditors can be added to establish the presumption of fraud.

► Luxury Goods or Services. Debts exceeding $650 to purchase luxury goods or services from a single creditor within 90 days of a bankruptcy filing.

The presumption makes it easier for a creditor to prove that cash advances or purchases of luxury goods were fraudulent. The creditor has the burden to prove fraud if the debt is incurred more than 70 days (for cash advances) and 90 days (for luxury goods and services) before the debtor files for bankruptcy. The burden shifts to the debtor to give a reasonable explanation disproving the fraud presumption if the cash advances or charges were made within these time periods.        Index

4. Credit Card Debts. The presentation of a credit card to a merchant constitutes an implied promise that the purchaser will repay the debt. Credit card debts and other loans are considered fraudulent if, at the time the debt was incurred, the debtor either:

► did not intend to repay the debt; or

► did not have a reasonable possibility of repaying the debt.

Credit card charges are normally considered fraudulent if the consumer makes charges knowing that he does not have a reasonable ability to repay the debt. The court will consider the following factors to determine if the charges were fraudulent:        Index

4.1. Time Between Card Use & Bankruptcy Filing. Many credit card issuers will review and scrutinize the account activity occurring within 6 months before the debtor files for bankruptcy to determine if the charges were fraudulent. The charges are more likely to be considered fraudulent if they are made within several months before the debtor files for bankruptcy. The charges are less likely to be considered fraudulent if a long time period passes between the date the debtor makes the charges and the date he files for bankruptcy.        Index

4.2. Consultation with Bankruptcy Attorney. Any debt incurred after the debtor considers filing or bankruptcy, or consults with a bankruptcy attorney, will usually be considered fraudulent, regardless of the circumstances. Communications between an attorney and client are privileged. Neither the attorney nor client can be compelled to reveal what they discussed. However, a debtor can be compelled to reveal the bare fact that he met with a lawyer. If the lawyer practices bankruptcy law, most courts will infer that the attorney and client discussed a possible bankruptcy filing.        Index

4.3. Number of Charges. The charges are more likely to be considered fraudulent if the debtor makes a large number of charges rather than a few isolated purchases.        Index

4.4. Dollar Amount of Charges. The charges are more likely to be considered fraudulent if the dollar amounts of the charges are large. Cash advances are also more likely to be considered fraudulent.        Index

4.5. Debtor’s Financial Condition at Time of Card Use. This factor is very important. If the debtor is in good financial shape when he makes the charges, and has a good chance of repaying the debt, the charges are less likely to be considered fraudulent. A fraud finding is much more likely if the debtor has few assets or financial resources when he makes the charges.        Index

4.6. Exceeding Credit Limit. The charges are more likely to be considered fraudulent if the debtor exceeds his credit limit when he makes the charges.        Index

4.7. Multiple Charges Within Short Time Period. Multiple charges made within a short time period may indicate that the debtor intended to go on a pre-bankrupty spending spree. The charges are less likely to be considered fraudulent if they are spread out over a long time period.        Index

4.8. Was Debtor Employed? The charges are more likely to be considered fraudulent if the debtor is unemployed at the time he makes the charges. If the debtor is employed when he makes the charges, he will be able to argue that he intended to use his wages to pay the debt.        Index

4.9. Employment Prospects. The charges are more likely to be considered fraudulent if the debtor is unemployed at the time he makes the charges, and also has a poor chance of obtaining a new job. Conversely, if the debtor is unemployed but has good prospects for obtaining a new job, the charges are less likely to be considered fraudulent.        Index

4.10. Sudden Changes in Buying Habits. The charges are more likely to be considered fraudulent if the debtor had a prior habit of making few charges over a long time period, and then suddenly started making large charges over a short time period.        Index

Example #1. Debtor approaches ABC Bank for a $20,000 loan. He gives ABC Bank a financial statement stating that he owns land, stocks and other assets worth $50,000. ABC Bank relies on this financial statement and loans him the money. In fact, Debtor’s land and other property is worth only $10,000, and he does not even own some of the property listed on the financial statement. Debtor is guilty of fraud because he lied on the financial statement. The $20,000 debt is not dischargeable in a Chapter 7 bankruptcy case.

 

Example #2. Debtor is an airline pilot earning $100,000 per year. The airline industry collapses because of terrorist high jackings, and Debtor losses his job. He has no reasonable possibility of obtaining employment in the near future, except a minimum wage job at a fast food restaurant or convenience store. At the time Debtor lost his job, he had 8 credit cards with an available credit line of $50,000. He also had a $250,000 home, a $2,500 mortgage payment, 3 children and a wife that refuses to work. Debtor uses the credit cards to pay his mortgage and other living expenses over the next 6 months. At the time he makes the charges, he knows that he has no reasonable possibility of obtaining a decent job to repay the credit card debt. The credit card charges will be considered fraudulent and are not dischargeable in a bankruptcy case because he knew that he would not be able to repay the debt when he made the charges.

 

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