Bankruptcy
Credit Card Debts in Bankruptcy
By Charles R. Harroun, Attorney at Law
Feb 29, 2004, 06:43

CREDIT CARD CHARGES AND
DISCHARGEABILITY IN
BANKRUPTCY

Debtor, Joseph Mickel, applied for and received a Visa credit card from Bethpage Federal Credit Union with a credit limit of $1,000.

Within a six month period, charges were incurred on the Visa card totalling nearly $10,000, although only two $10 payments were made on the account during that period. During one month, debtor’s Visa statement consisted of six pages, enumerating approximately seventy purchases in Egypt. The credit union terminated the line of credit, however, this termination did not take effect and the card remained operable for “some time.”

One month after the credit union attempted to terminate debtor’s credit card privileges, the credit union insti-
tuted a State Court collection action. Debtor filed an Answer to the Complaint that admitted default on the payments; the Answer did not deny or dispute the debt alleged to be owed. Debtor’s Answer further alleged that he had filed for bankruptcy, although debtor had not, in fact, yet filed bankruptcy. Approximately five weeks later, debtor did file bankruptcy.

The credit union brought an adversary proceeding in the bankruptcy court to hold the Visa debt nondischargeable and alleged the debtor obtained such credit by “false pretenses or actual fraud.” In response to the Complaint filed in the Bankruptcy Court, debtor stated: “. . . I could not have possibly incurred $9,968.40 worth of charges. I do not believe that most of the charges are mine.” The debtor also alleged in his Answer to the Adversary Complaint that the Visa card had been lost or stolen while he travelled in Egypt.

The Court noted that two issues will determine the outcome: first, whether debtor in fact incurred and is liable for the debt arising from use of the Visa card; second, whether the debt, if indeed owed, is nondischargeable.

The Court observed that debtor’s Answer to the Adversary Proceeding alleged, for the first time, that the credit card had been stolen. Debtor’s assertion of loss or theft of the card was inconsistent with his Answer previously filed in the State Court collection action, when he admitted the debt was owing; as well as being inconsistent with debtor’s sworn bankruptcy schedules, which state that debtor had not suffered any loss or theft within one year prior to filing for bankruptcy. In addition, the bank- ruptcy schedules list these Visa charges as an “undisputed debt.”

The Court made two rulings: first, the Court found that debtor’s allegation of loss or theft of the Visa card was not credible and debtor failed to present any substantiation or documentary evidence that the card had, in fact, been lost or stolen. Hence, the Court held that debtor did owe the Visa balance to the credit union.

Second, the Court noted that in order to hold a debt nondischargeable, five elements must be proven by the creditor. Those elements are: (1) debtor must make an express or implied false representation; (2) the representation must be made with knowledge that it was false at the time it was made; (3) the false representation must be made with the intent to deceive; (4) the creditor must have reasonably relied upon the debtor’s misrepresentation(s); and (5) the creditor must establish that it was damaged.

In this case, the Court held that the “Plaintiff [credit union] has not adduced any evidence that an implied false statement was made or that the credit card debts were incurred with fraudulent pretenses.”

EDITOR’S COMMENT

The court above noted that the credit union “only asserted that there must have been fraud because Debtor exceeded his authorized credit limit by nearly ten times.” Hence, this court found that the credit union had not met its burden of proof in establishing the requisite five elements of fraud.

Other courts, however, have held that the mere act of a debtor placing charges on a credit card implies the debtor’s intent to repay the debt, and failure to repay the debt constitutes fraud.