Bankruptcy Timing and the Holidays: The "Cash Advances" Presumption of Fraud

 Posted on December 14, 2015 in Bankruptcy Procedure

If you can, don’t do cash advances during the holidays if you’re contemplating filing bankruptcy. If you do, understand the rules about them.

In our last blog post we explained the “luxury” presumption of fraud. This provision in bankruptcy law increases the risk that you would not be able to “discharge” (legally write off) a very particular kind of debt. That kind of debt would be one that resulted from a purchase or a set of purchases totaling more than $650 made during the 90 days before filing bankruptcy.

The “cash advances” presumption of fraud is closely related to the “luxury” one. The dollar amounts and timeframe are just a little different. This “cash advances” presumption increases the risk that you would have to pay a debt tied to a cash advance or set of cash advances totaling more than $925 made during the 70 days before filing bankruptcy. (Notice that for this presumption to kick in, you incur somewhat more credit in a somewhat shorter period of time than with the “luxury” presumption of fraud.)

The Risk of Doing Cash Advances Shortly Before Filing Bankruptcy

We keep talking about the increased risk of not discharging a debt. What do we mean by this?

We mean that you could very well still discharge a debt from a cash advance done within the 70 days and more than $925. There’s just a greater risk that you couldn’t. Let us explain.

First, if you happen to do a cash advance of more than $925 (or a series of them with the same creditor) within the 70 days before filing bankruptcy, you may not have to pay that debt. That’s because you will not have to pay it unless a creditor complains about it, and does so within a deadline which is about 100 days after your bankruptcy case is filed. If you list the creditor in your bankruptcy case and it doesn’t complain within the deadline, that cash advance debt would simply be written off.

Second, the creditor may file a formal complaint and do so on time but that doesn’t mean it will win. A cash advance within the 70 days and exceeding $925 only creates a presumption that you didn’t intend to pay that debt. That presumed intent can be defeated by evidence showing that you did actually intend to pay it at the time you did the cash advance(s).

Third, you can avoid this “cash advance” presumption altogether by simply waiting to file your bankruptcy case until at least 71 days after the (latest) cash advance. Then the creditor gets no presumption of fraud and actually has to come up with evidence that you didn’t intend to pay the cash advance debt. Without some evidence it can’t file a complaint (although the evidence could be circumstantial, such as you not making any payments on the account after the cash advance indicating lack of intent to pay it).

The Risk of Doing Cash Advances More than 70 Days before Filing Bankruptcy

Even a cash advance done outside the 70-day presumption period comes with some risk that this cash advance debt would have to be paid. The creditor just has to have evidence that you didn’t intend to pay the debt, no matter when the debt was incurred.

Two Practical Truths about the Advantage of Presumptions of Fraud

Beyond anything written in the law, here’s why the “cash advance” presumption of fraud (and the “luxury” one as well) works in favor of creditors:

1) The presumptions allow creditors to win without any evidence of fraud in cases where the debtors don’t respond to the creditors’ complaint. Because debtors who file bankruptcy not represented by an attorney are much more likely to not respond, some creditors are more inclined to file these complaints in those unrepresented cases. When the debtor does not respond on time, the creditor gets a judgment by default against the debtor.

2) When a debtor does respond (generally through his or her attorney) to a creditor’s complaint, the matter is often settled with the creditor getting paid at least something out of the cash advance at issue. That’s because the high cost in attorney time compared to the relatively small amounts usually at issue often makes fighting the complaint much more expensive than just quickly settling it.

Because of these two practicalities, the presumptions of fraud gives creditors more motivation to file complaints whenever there is a cash advance exceeding $925 during the 70 days before a bankruptcy filing, even without much indication that the debtor didn’t intend to pay that debt at the time.

The Bottom Line

The presumption only gives a modest legal leg up. But the practical advantage is significant. So whenever possible it’s usually worth waiting to file your bankruptcy case until after the 70-day “cash advance” presumption of fraud period (and the 90-day “luxury” one as well) has passed.