Gambling law in New York is a confusing, evolving quagmire, so it’s understandable that debtors might be curious to know about how New York bankruptcy treats gambling debts. To begin with, money borrowed for gambling is generally unsecured debt that a chapter 7 case can dispose of easily. That’s the easy answer.
The tougher answer comes down to whether debtors committed any fraud when borrowing money to engage in gambling—an issue I have fought to success for clients. Section 523(a)(2)(A) of the Bankruptcy Code prohibits the discharge of any debts for fraud, so if a creditor asks a gambler if he or she can afford to repay a debt, and the gambler lies, then that debt isn’t dischargeable. That was the controversy in a case of mine in which the debtor owed $200,000 in markers to creditors in Las Vegas. The creditors claimed he lied about where he’d get the money to repay the debt, but the Second Circuit Court of Appeals agreed that he had legitimate access to his wife’s company’s accounts.
In many cases, out-state casinos sue New York debtors in their home states to collect on signed markers. The judgments are enforceable in New York, so casinos’ lawyers will object to the debts’ dischargeability, claiming that the markers are in fact misrepresentations of funds to pay the debts. Sometimes these situations can be settled out of court, but as with the case discussed above, they can lead to litigation.
The next issue relates to the timing of gambling losses and money borrowed for gambling. Official Form 107 explicitly asks debtors if they’ve incurred any gambling losses within the last 12 months and the amount. The question is really about all property losses, not just gambling debts, so it won’t have a direct impact on a bankruptcy case. However, debtors who omit a gambling loss can suffer the same penalties for any other misrepresentation in a bankruptcy form, including denial of discharge or criminal sanctions if appropriate.
It’s also common for debtors to take out cash advances from credit cards, but the Bankruptcy Code allows creditors to challenge the dischargeability of these debts if they are taken out within 70 days of the bankruptcy filing and if they exceed $950. Similarly, some creditors are arguing that gambling debts are for “luxury goods or services,” which if incurred within 90 days of the bankruptcy filing are presumed nondischargeable. However, in some circumstances, the presumption is rebuttable, permitting debtors the opportunity to discharge gambling debts.
Despite all this and the state’s history, it might surprise debtors to learn that most types of gambling and gambling agreements are actually illegal under New York law. The state’s constitution does allow betting on horse races, which are considered sports that don’t depend on human competition, and up to seven casinos upstate, thanks to a constitutional amendment in 2013. Casinos on Indian tribal lands are not subject to state laws. Some off-track betting, charitable gambling, and private gambling is allowed (no jokes about Wall Street, please), but otherwise state law frowns on it. Indeed, section 5 of the General Obligations Law provides people who lose at illegal gambling to recover some of their wagers and property. There can be criminal consequences as well.
What this means in the bankruptcy context is that sometimes debtors may be able to undo some of the damage done by illegal gambling with the help of state courts rather than bankruptcy courts. In other circumstances, property they lost might be avoided by a bankruptcy trustee. In practice, given that gambling is an underworld activity, using official channels might not be preferable, but that’s why the automatic stay and discharge order come with serious teeth for creditors who try to enforce debts.
Gambling debts are a frequent contributor to bankruptcy filings, but at least the law sides with honest debtors. If gambling has contributed to your financial problems, then talking to an experienced New York bankruptcy lawyer can help. I have handled many cases involving gambling debts and the unusual legal issues surrounding them.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.