Credit Card Cash Advance Debts in Bankruptcy
11 USC §523(a)(2)(C)(i)(II) states that cash advances totaling more than $875 representing extensions of consumer credit under an open ended credit plan [credit cards] obtained by an individual within 70 days before filing for bankruptcy are presumed to be nondischargeable. As with luxury goods or services, the presumption of nondischargeability can be rebutted by showing the court that the debt was not incurred in contemplation of bankruptcy. To be successful the rebuttal must raise a serious doubt in the mind of the court as to the debtor’s bad intent.
Cash Advances vs. Balance Transfers
The term “cash advance” is not defined in the bankruptcy code. Accordingly, creditors have asserted that cash advances are defined by their internal treatment of the credit advanced and by the terms their cardholder agreements. In response, bankruptcy courts have rejected these self-serving definitions. (See In re Poor). Furthermore, bankruptcy courts have found balance transfers accomplished by use of a credit card to pay off another debt to be outside the scope of §523(a)(2)(C). In making credit card cash advances presumptively nondischargeable Congress intended to prevent debtors from charging up their credit cards on the eve of bankruptcy only to petition the court for discharge of the recently incurred credit card debt in bankruptcy. However, balance transfers do not enrich the debtor but rather refinance debt. Since balance transfers are not akin to the type of fraudulent activity Congress sought to prevent, balance transfers are not cash advances within the scope of §523(a)(2)(C).
Example: Cash Advance
A credit card company offers “convenience checks” to its customers. The convenience checks can be deposited into the card holder’s bank account with the value deposited added to the card holder’s total credit card debt. A card holder deposits a $900 convenience check into this bank account. 60 days later the card holder files for bankruptcy. Since the extension of credit was under an open ended credit plan (an account under which repeated transactions are contemplated) and totaled more than $875 within the 70 day period before bankruptcy the $900 debt for the convenience check is presumed to be a nondischargeable debt in bankruptcy.