Bankruptcy Exceptions to Discharge



Most debts are eligible for Discharge under the Bankruptcy Code.  However, Bankruptcy Code Section 523 lists certain debts that are not discharged in Bankruptcy.  Such debts, if unpaid will remain in existence after the completion and Discharge of a Chapter 7 Bankruptcy.  These exceptions to Discharge are to be interpreted narrowly and the creditor carries the burden to prove every element of an exception to Discharge by a preponderance of the evidence.

When the Bankruptcy Code was enacted, Section 523 contained a limited number of exceptions to Discharge, primarily addressing various forms of wrongdoing, such as intentional torts, fraud, and defalcation.  Section 523 has been expanded beyond matters of moral turpitude to include other exceptions which are determined to be not dischargeable based upon the inherent nature of the obligation.  These exceptions include domestic support obligations, such as child support or alimony.  Other exceptions are most student loans, tax obligations.  Congress has determined that the societal interest in preventing the Discharge of such debts is greater than the debtor’s interest in obtaining a fresh start through bankruptcy proceedings.

Whereas Section 523 addresses individual debts, Section 727 governs the debtor’s ability to receive a Discharge of the entire Chapter 7 Bankruptcy.  Both Section 523 and Section 727 of the Bankruptcy Code may be relevant if a creditor brings an action to prevent the Discharge of certain credit card debts.

Bankruptcy Code Section 523(2)(A), (B) and (C) address the circumstances under which credit card debt may be determined to not be Discharged in a Chapter 7 Bankruptcy.  Bankruptcy Code Section 523(a)(2) states that debts incurred for “money, property, services or an extension, renewal or refinancing of credit, the extent obtained by false pretenses, a false representation, or actual fraud….” are not Discharged in a Chapter 7 Bankruptcy.  Furthermore, Bankruptcy Code Section 523(C)(I) states that “consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable.  Bankruptcy Code Section 523(C)(II) states that “cash advances aggregating more than $935 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable”.  Section 523 defines “luxury goods or services” as not including “goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor”.

Generally, a creditor that wishes to challenge the dischargeability of a debt under 523(a) has the burden of proof to show that the debtor knowingly made misrepresentations, the debtor intended to deceive the creditor when making those representations, and the creditor justifiably relied on the representations, which proximately caused the creditor’s damages.

However, the disparate courts interpret this general test various widely.  The first element of the test is that the debtor knowingly made misrepresentations.  Some courts hold that the debtor or customer misrepresented to the creditor when he or she was able to repay the credit card debt when he or she used the credit card.  According to this interpretation, merely using the credit card manifests both an intent and present ability to pay.  According to such an interpretation, if the debtor is later unable to repay the credit card, the original use of the credit card is determined to be fraudulent.  Such a finding may ensue even if the creditor had no reasonable expectation that debtor had the ability to repay the charges when incurred.

Such an approach is clearly punitive against the debtor and may reasonably lead one to conclude that virtually any credit card usage could be determined to be nondischargeable in a Chapter 7 Bankruptcy.  Other courts have found that a “customer’s use of a credit card constituted an express or implied representation of an intent to pay”.  Another court found that the use a credit card is not a representation or a misrepresentation because such use is not statement that can be found to be true or false.

Neither approach is satisfactory for creating a fair determination of intent.  The first interpretation appears to make any use of a credit card, that is later unpaid, to be a form of misrepresentation.  The second approach would seem to make any use of a credit card, without an express expression of an intent not to repay such debt at its incurrence, to be an expression of misrepresentation.  It is the duty of the bankruptcy practitioner to be cognizant of how such interpretation is made within the Circuit or District within which he or she practices.

Determining the debtor’s intent to deceive in the use of the credit card is an important element in proving misrepresentation, fraud, or false representation.  In the Supreme Court case of Fields v Mans, the Court held that Congress could have prevented Discharge on the basis of unintentional misrepresentations, but it would “take a very clear provision to convince anyone of anything so odd”.

In most cases it is very difficult for a court to determine the subjective intent of the debtor.   Likewise, explicit intent is also very seldom present.  Most debtors will not state that they intended to use the credit card with no intention to repay such debt.  Therefore, most courts will use objective criteria in making a determination that the debtor acted deceptively.

Among the factors used in determining the objective intent of the debtor include whether the credit card charges exceeded the debtor’s credit limit, the number and amount of charges, whether the debtor consulted an attorney about bankruptcy before making the charges, the amount of time between the charges and the filing of the bankruptcy, the financial condition of the debtor at the time of the charges, whether the purchases were for luxury or necessary items, the financial sophistication of the debtor, whether the debtor suddenly changed his or her buying habits, the employment or income status of the debtor, including the prospects for employment, and whether the debtor made multiple charges on the same day, or in close proximately to each other.

The courts also differ on the application of these factors.  Some courts require that all of the factors be present for a finding of the objective intent of the debtor to have committed misrepresentation of fraud in the use of the credit card or credit cards.  Other courts only require a finding of one or two of the factors.

Another issue is the creditor’s reliance on the debtor’s representation by his or her use of a credit card.  A Supreme Court case involving a land sale, Fields v Mans, held that the creditor must prove that its reliance was justifiable.  If the misrepresentation by the debtor was readily apparent, the creditor cannot maintain an action against the debtor for fraud or misrepresentation.  However, while the Fields case clarified that reliance by the creditor must be reasonable, the plethora of issues relating to credit card debt was unresolved.

Thus, the divergence of interpretation by the various lower courts continues.  While some courts do not require any proof of reliance, others view reliance as a necessary element of fraud, which must be proven by a preponderance of the evidence.  Such courts will require the creditor to prove that it did not provide or extend credit, absent any determination of the credit worthiness of the debtor or customer.

Some of the promotional strategies employed by the credit card companies further confuse such determinations of creditor reliance, and justifiable reliance.  The many unsolicited credit card offers made by credit card companies is one such strategy.  The second strategy is what is referred to as the “live check”.

In a live check situation, the credit card company sends an unsolicited check to a potential customer.  By signing or endorsing the check, the consumer is subjected to the terms contained in the credit agreement, such terms usually being of extremely small print, and oftentimes confusing or difficult to discern or understand.

Because of the differing interpretations by the various courts and the lack of a clear standard in determining when credit cards are to be deemed dischargeable in Bankruptcy, a number of difficulties arise.  It appears that a growing number of creditors are bringing or threatening to bring, Adversary Proceedings in Bankruptcy, to determine the dischargeability of credit card debts.

Certainly, some creditors bring these actions, not because of the merit of their claims, but with the knowledge that a significant portion of debtors are unable to adequately defend such actions.  Many bankruptcy attorneys represent their clients for a fixed or flat fee.  Most bankruptcy attorneys consider representation of their client in an Adversary Proceeding to be additional representation, apart from their representation in the Bankruptcy.

For a debtor with limited financial resources, the prospect of providing compensation to a bankruptcy attorney to represent him or her in an Adversary Proceeding can be daunting.  Competent and diligent representation by a bankruptcy attorney in such litigation can be expensive.  A fair determination of the attorney fees to properly represent such a client can be estimated to cost between $2,000 to $5,000.

Oftentimes, the bankruptcy attorney is motivated to settle the Adversary with the creditor to avoid such an expense.  Often, the debtor does not have the financial means to wage such a defense, even when the action brought by the creditor is wholly without merit.  The creditors realize this dynamic and are increasingly bringing such actions, with the knowledge that the debtors are essentially defenseless.

The Bankruptcy Code does provide a fee shifting provision to assist debtors who are assailed by unjustified or unsubstantiated claims by such creditors.  However, the many differing interpretations of Section 523, and the vague criteria for determining dischargeability make it very difficult for the debtor to prove that the Adversary Proceeding brought by the creditor has no justification.  Therefore, the debtor has no assurance that he or she will be reimbursed for the attorney fees necessary to defend such an action, even if such action is completely without merit.

There are certain disincentives present that may dissuade a creditor from bring such an Adversary Proceeding.  The creditor must pay its own attorney along with the requisite filing fees, to bring an Adversary.  Such costs may amount to numerous thousands of dollars.  For a debtor in Bankruptcy who has incurred a few thousand dollars on a credit card, it may not be financially intelligent to incur an expense of a few thousand dollars to potentially recapture a few thousand dollars from the debtor.

I, myself, have successfully represented many clients in the defense of such Adversary Proceedings brought by creditors.  I have also settled many Adversary Proceedings on behalf of my clients.  I will not undertake to defend an Adversary Proceeding unless I am confident of a good chance that my client will prevail.

Of the numerous Adversary Proceedings that I have settled on behalf of my clients, the creditors usually agree to similar terms.  The creditors will usually accept the reduction of the credit card debt to 50% of the outstanding balance.  In addition, the creditors will usually reduce the interest rate on the credit card debt to 0%.  Finally, the creditors will usually accept payments of $50 to $100 per month, in payment of the credit card debt.


This is the first part in a series of articles on exceptions to Discharge under the Bankruptcy Code.  Subsequent articles will discuss other exceptions to Discharge, including Student Loans, Tax Debts, Alimony and Child Support, and Intentional Torts.

Jay Weller has primarily practiced Bankruptcy Law in the State of Florida, since 1993.  Mr. Weller has represented many thousands of clients in Bankruptcy Proceedings, including Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.  Weller Legal Group is the last remaining law firm in the Tampa Bay area, providing not only representation in Bankruptcy, but also representation in the many programs that are alternatives to Bankruptcy.  Weller Legal is also the sole remaining law firm in the Tampa area with multiple offices to assist those seeking such representation.  With offices in Clearwater, Port Richey, Brandon, and Lakeland, Weller Legal is available to help the many members of our community seeking relief from debt.