Consider what the difference is between someone who steals money from another and someone who borrows money from another without repaying it. At what point does that amount to simply stealing as well? In New York bankruptcy the line between these two is very important because a creditor that believes it has been cheated by a borrower will use its power to convince the bankruptcy court that the debtor is not entitled to a discharge, and then possibly seek other remedies. How does this work?
Mostly this is a problem that arises in chapter 7 and revolves around credit-card debt. It’s rarely a situation of a debtor borrowing money from a friend and then not repaying it. Instead the debtor identifies credit-card debt in his or her petition and the creditor objects.
I discussed this circumstance specifically in a post titled, “When Can Lenders Challenge the Dischargeability of Credit-Card Debt?” But the summary is that creditors can file adversary proceedings against debtors, relying on section 523(a)(2) of the Bankruptcy Code, which forbids the discharge of debts incurred based on some kind of falsehood or deceitful financial statement. (In a 2016 case, the U.S. Supreme Court held that “actual fraud” does not require a misrepresentation and can encompass fraudulent conveyances.)
The crux of the situation is the debtor’s intent and how to prove it. If the debtor lied, moved money around suspiciously to thwart the creditors, then the creditor will be able to show in the adversary proceeding that the debtor essentially stole the money. By contrast, if the debtor did not lie, then the creditor can’t prove the debt should be discharged. It helps substantially if the debtor can show that he or she tried to repay the debt.
There are, however, two situations in which the lender will not need to prove any kind of deceit on the debtor’s part. One is if the debtor borrowed more than $675 to purchase luxury goods or services in the 90 days leading up to the bankruptcy filing. The other is if the debtor took out $950 or more in cash advances within 70 days of the bankruptcy filing. The law gives some leeway to debtors whose actions don’t meet these criteria, but I definitely would not recommend it.
Ultimately, there is a point where the Bankruptcy Code will punish a dishonest borrower by denying him or her a discharge, but that’s very different from the penalties for someone who actually steals money. I’ve never seen a creditor press criminal charges against a debtor for fraud on credit-card debt.
If you have significant credit-card debt, and you’re considering bankruptcy, then you probably shouldn’t worry about creditors treating you like a thief. Consulting with an experienced New York bankruptcy lawyer will help you strategize your options.
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 bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
