Section 523(a)(2)(A) provides that a debt is nondischargeable if it was obtained as a result of “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”
Courts have three approaches in analyzing the dischargeability of credit card debt:
(1) “implied representation” theory. Each time a debtor uses his credit card he is impliedly representing that he has the intention and the ability to pay the charges. Courts read into this a requirement that the debtor’s representation that he has the ability to pay the charges be reasonable. Therefore, courts have denied discharge having found the debtor’s belief that he could pay his debt out of his gambling winnings to be unreasonable. See cases: American Express Travel Related Services Co., Inc., v. Nahas (In re Nahas), 161 B.R. 930 (Bankr. S.D. Ind. 1994)-the debtor’s desire to gamble to repay his debt did not constitute the requisite intent to repay his debt and found Nahas’ debt was not dischargeable. See also AT&T Universal Card Services Corp. v. Picket, 234 B.R. 748 (Bankr. W.D. Miss. 1999)-The court adopting the implied representation approach to deny the dischargeability of his credit card debts acquired through gambling. AT&T Universal Card Services Corp. v. Mercer (In re Mercer), 246 F. 3rd 391 (5th Cir. 2991)(en banc)-The 5th Circuit chose to adopt the implied representation theory. Holding each use of the credit card is an implied representation of the debtor’s intent to pay. The creditor can show reliance on the debtor’s implied promise by showing that it would not have approved the loan but for the debtor’s promise to pay (through credit card use). The implied representation theory has been criticized in numerous cases. Many courts have taken the position that this elevates the status of credit card companies and makes their debts too easily dischargeable. The Court in Chase Manhattan Bank (U.S.A.) N.A. v. Carpenter (In re Carpenter), 53 B.R. 724 (Bankr. N.D. Ga. 1985) points out that people use credit cards because they do not have the present ability to pay.
(2) “assumption of the risk” theory. Under this approach, first expressed in First National Bank v. Roddenberry 701 F.2d 927 (11th Cir. 1983) the credit card issuer assumes the risk of nonpayment. Only after the issuer has notified the cardholder that the card has been revoked and the debtor has incurred charges anyway are the debts potentially nondischargeable. This theory is totally at odds with the “implied representation” theory and accepted by only a few courts.
(3) “totality of the circumstance” approach. The court must look at a wide variety of factors to determine the debtor’s intent to pay or lack thereof. The factors with which the court may use to analyze the debtor’s intent to repay are:
1. period between when charges made and bankruptcy filed;
2. was an attorney consulted about filing bankruptcy before the charges were incurred;
3. the number of charges made;
4. the amount of the charges;
5. the financial condition of the debtor at the time the charges were made;
6. whether the charges were above the credit limit of the account;
7. whether the debtor made multiple charges on the same day;
8. whether or not the debtor was employed;
9. the debtor’s prospects for employment;
10. financial sophistication of the debtor;
11. whether there was a sudden change in debtor’s buying habits: and
12. whether the purchases were made for luxuries or necessities
As illustrated in the case of Anastas v. American Savings Bank (In re Anastas) 94 F. 3rd 1280 (9th Cir. 1996). The debtor received cash advances from a credit card and used the funds to gamble at several Lake Tahoe casinos over a six month period. At the time of filing, he owed over $6,000 to the plaintiff-bank and $40,000 in total credit card debt. The court looked at whether he had the intent to repay as opposed to the ability to pay and the court citing the twelve factors stated above concluded that the debts should be discharged. The debtor’s financial condition should be only one factor to consider in making a determination as to dischargeability for fraud.
A creditor must prove:
1. The debtor made the representation
2. the debtor knew that the representation was false when made
3. the debtor made the false representation with the purpose and intention of deceiving the creditor and
4. the creditor justifiably relied on the misrepresentations and
5. The creditor sustained a loss as a result of those misrepresentations.