Bankruptcy, judges & credit card fraud

The bankruptcy process can be confusing, stressful and even a little scary sometimes. Thankfully, there are an array of exceptional financial professionals out there, the most helpful being your reputable bankruptcy attorney, all of whom can help you navigate the choppy waters and put your life back on track.

It pays to understand for yourself as much about the bankruptcy process as possible. The more knowledge you gain, the easier it will be for you to comprehend how to help those you are helping you. Since bankruptcy is a legal process, it will involve the courts. And courts mean judges.

So, exactly what role does a bankruptcy judge play in your case? It can vary, depending on the complexity of your case and whether someone (such as a creditor or the trustee) objects to your bankruptcy.

In probably 98% of all cases, there are no objections and your case will proceed to discharge with no direct involvement by the bankruptcy judge. However, there is an exception to every rule.

One exception is where the court gets involved to determine whether or not you took a credit card company's money with absolutely no intent to pay it back, thereby working a fraud on the credit card company. If this can be proved, the credit card company can avoid having its debt wiped out in bankruptcy.

Thankfully, many judges have grown weary of hearing credit card companies claim that they are the victims. The aggressive marketing pitches, ceaseless trail of direct mail and high-value television ads that claim all it takes to lead a charmed life is a credit card number and a dream are starting to catch up with them. While some judges are recognizing the impact credit card companies' "lifestyle marketing" has on consumers, they are not automatically going to grant you leniency because in almost all cases, you obviously played a significant role in the accumulation the debt.

If the creditors had their way, your mere use of their credit card and your inability to pay it back would be tantamount to fraud. Judges have roundly found this argument unpersuasive. Using a card will imply an "intent" to pay it back. However, courts recognize that, for the most part, there is little, if any, relationship between intent to pay and your actual "ability" to pay. As a result, in the vast majority of cases, courts have refused to find wrongdoing merely based upon the inability to pay.

As a consequence, in those rare situations where a credit card creditor wants to claim fraud, the creditor is left with no easy task. To prevail, the creditor must present to the court a convincing series of facts and events that would leave the court with only one conclusion, that you never intended to the debt back, and that, in turn, you committed fraud. In legal terms, these facts and events are referred to as the "badges of fraud".

For example, judges will look to see if there was a flurry of charges very close to the date bankruptcy was filed. This would demonstrate that perhaps you made the decision to file bankruptcy and purposefully intended to increase your balances with senseless purchases as quickly as possible, with absolutely no "intent" to pay for them. If so, a judge could rather easily side with your creditors.

The court may also use your dealings with a bankruptcy attorney as a measure of intent to pay. Namely, did you make more charges after you met with your attorney? Clearly, simply meeting with a bankruptcy attorney to learn about options and ask questions does not directly translate into proof you meant to defraud the creditor. More than likely, this will not become an issue, as any reputable attorney will advise you cease credit card spending, whether or not you file.

Bankruptcy judges will also give consideration to your financial state when you made significant charges. If you were clearly in economic high water when that new plasma television was backed into the driveway just before the Final Four, it may not look good in the eye of the court. Still, if a new job was promised or an influx of cash was expected and then evaporated, a judge may be a bit more compassionate.

When using a credit card, regardless of how chronologically adjacent it was to when you filed bankruptcy, you should practice good judgment and sound financial discipline. Do not simply temporarily change spending habits based on your current situation. Like eating well and other lifestyle choices, smart credit card usage should be a discipline you practice consistently and always in respect to how it impacts everything, and everyone, around you.