If you are having trouble paying down debts, you may want to consider bankruptcy. The goal of bankruptcy is to discharge your debts. However, there are circumstances in which a creditor can challenge a debt and refuse to discharge it.
The reason this would happen is due to fraud. The bankruptcy court will be looking at the length of time between when you incurred the debt and when you filed for bankruptcy. If you file bankruptcy too soon after incurring the debt, the creditor may challenge your ability to discharge that debt.
This is due to a “presumption of fraud.” The bankruptcy code includes a presumption that certain debts are not able to be discharged. This presumption covers debts for luxury goods and services incurred within 90 days of filing for bankruptcy. Cash advances of more than $875 on a credit card within 70 days of filing are also included in the bankruptcy code.
You can fight a presumption by providing evidence to the contrary. You, as the debtor, would then have the burden of proof.
There are several things that can indicate fraud:
- The length of time between the charges and the bankruptcy filing
- The number of charges made
- The amount of the charges
- Whether or not the charges were above the account’s credit limit
- If the debtor made multiple charges on the same day
- Whether or not the debtor was employed
- A sudden change in the debtor’s buying habits
- If the purchases made were luxuries or necessities
Fraud can occur before or during a bankruptcy case. Here’s a look at what each one entails.
Fraud Before Bankruptcy
Fraud may occur before a bankruptcy filing when someone uses bankruptcy to erase a prior act. Some examples of fraudulent behavior include the following:
- Obtaining credit under false pretenses, such as misrepresenting income or assets on a credit application.
- Purchasing items on existing credit with no intention of repaying the debt
- Charging expensive items or taking out large cash advances shortly before filing for bankruptcy
- Knowingly writing a bad check
- Engaging in deceptive business practices
Fraud During Bankruptcy
Sometimes, fraud happens during bankruptcy in an attempt to hide property. Here are examples of actions that could indicate fraud:
- Failing to list an asset on the appropriate bankruptcy schedule to prevent it from being sold
- Concealing a property transfer that occurred before the bankruptcy
- Providing a false document to the bankruptcy court or trustee
- Destroying or withholding documents
- Paying someone to help hide property from the court
What can you do to prove otherwise?
You’ll need to show that your actions weren’t taken with the intent of deceiving creditors. For example:
- You used your credit card for necessities, not luxury spending
- You weren’t planning to file bankruptcy at the time of the charges
- You didn’t hide assets – there was simply a misunderstanding or mistake
Strong documentation can make or break your case. This includes:
- Receipts showing purchases were made for essential items
- Communication showing your financial situation changed unexpectedly (job loss, medical emergency, etc.)
- Evidence of full disclosure of assets and debts on your bankruptcy paperwork
If the court is operating under a presumption (e.g., charges within 90 days before filing are assumed fraudulent), your job is to rebut that presumption. This means showing that despite the timing, your intent wasn’t to defraud creditors.
Sometimes, reaching a settlement with the creditor (e.g., partial repayment of the debt in exchange for dropping the claim) may be a more practical option, depending on the strength of the case.
What’s at Stake?
If the court agrees that fraud occurred:
- That specific debt may be non-dischargeable (you still must pay it)
- Your entire bankruptcy case could be dismissed
- You could face civil penalties or even criminal charges in extreme cases
Fighting a presumptive fraud charge in bankruptcy isn’t something you should try to handle alone. A skilled bankruptcy attorney understands the complexities of the law and knows how to navigate the court system effectively. They can help you build a strong defense by gathering the right documentation, crafting a compelling explanation for your actions, and representing you in any hearing or adversary proceedings. An attorney can also negotiate with creditors on your behalf and ensure that your rights are protected throughout the process. Having experienced legal counsel dramatically increases your chances of a favorable outcome and can help relieve the stress of facing serious allegations.