Gambling Debt and Bankruptcy: Pitfalls & Traps for the Unwary
Gambling debt and bankruptcy can be a troublesome combination. A bankruptcy petition, either Chapter 7 or Chapter 13 bankruptcy, requires that a large amount of very specific information regarding your assets and property, your debts, any past transfers of cash or property, and even evidence of your "good faith" in the filing of the bankruptcy itself be disclosed in detail in the bankruptcy petition and the schedules and other documents attached to it that you must file with the Bankruptcy Court. The requirement of full disclosure of this information can be tricky for someone who has lost money or property or who has devoted a significant portion of their income to gambling. For a "problem gambler" with a bona fide addiction to gambling, just stopping in order to make the disclosure of this information more straightforward and simple over time is likewise sometimes easier said than done.
Gambling Debt and Bankruptcy: Reporting of Gambling Losses Is Required
The first pitfall of gambling debt and bankruptcy is that all gambling losses incurred in the year prior to the Chapter 7 or Chapter 13 filing must be reported on the "Statement of Financial Affairs" which accompanies every bankruptcy petition that is filed. The bankruptcy trustee and court request this information, among other things, so that they can determine whether any fraudulent transfers have occurred or if there is any measure of "bad faith" in the filing of the bankruptcy. While very few bankruptcy cases suffer from any allegation of "bad faith" (bankruptcy is a Constitutional guarantee, after all!), bad faith is a basis for a denial of the discharge of your debts by the US Bankruptcy Court. It is one of the few ways in which a person filing for bankruptcy may not receive the discharge (free of obligation to pay a debt) of debt that is the point of the whole process. Not a single former client of The Hilla Law Firm, for example, has ever been denied a discharge for bad faith. But it does happen. And one of the principal points in the bankruptcy process at which bad faith might be found by the court is where one creditor is either favored over other creditors by the filing debtor, or where assets or cash that might have been part of the Bankruptcy Estate that is administered by the Bankruptcy Trustees is otherwise transferred in the months or year prior to the filing of the case. That is, in bankruptcy, creditors are paid in an established, preferential order, and any attempt to pay a particular creditor out of that order may result in the trustee avoiding the transfer, which means undoing it and requiring the funds be returned from the transferee. Chapter 7 Trustees have the power to avoid transfers which appear fraudulent because they are transfers for which the debtor received "less than reasonably equivalent value," which is the basic benchmark for determining fraud under the Bankruptcy Code, among a few other considerations. Thus, when you have gambling debt and bankruptcy is desired, you are going to have to disclose any payments made to bookies, casinos, or other gambling-related creditors. Depending upon the professional nature of the gambling creditor receiving the payment, this very disclosure may be highly, highly undesirable as it requires providing the name and address of the individual receive the funds in the public record bankruptcy petition. If you sold off personal property in order to pay the debt, or you simply titled property over in satisfaction of the debt, a Chapter 7 Trustee in particular, depending upon the amount of money or value involved, is very likely to pursue that individual to avoid, or undue, the transfer and retrieve the money or property for re-distribution to your other creditors.
Gambling and Bankruptcy: Non-Dischargeability of Debts
Where there is gambling debt and bankruptcy, beyond the initial filing of the petition and these powers of the trustee to undo transfers of funds that appear fraudulent, it is also possible that gambling losses will be found nondischargeable as the bankruptcy proceeds. This is particularly true when it comes to credit card cash advances received by the debtor wishing to file bankruptcy for the purpose of paying off or incurring gambling debts. When this is the case, the credit card issuer may file a complaint to object to the discharge of the debt, and, when that occurs, it is resolved through a process known as an "adversary proceeding," which is a form of Federal civil litigation in Bankruptcy Court. It requires extra time and work for the debtor's bankruptcy attorney, and, thus, it raises the cost of what could have been a simple bankruptcy filing for a given flat-fee to a point that is less manageable for the debtor. And, of course, the outcome of the litigation to declare the debt non-dischargeable will have some resolution that will cost you: victory and additional attorney fees, failure and additional attorney fees and the need to repay the debt in full, or settlement of some sort.
Gambling and Bankruptcy: Luxury Goods or Services and Bona Fide Addiction
Some courts examining issues of gambling debt and bankruptcy have also found gambling debts to qualify as "luxury goods or services," which would, especially if incurred very near the date that the bankruptcy petition was filed, also likely render the debt nondischargeable. However, other courts, under very specific facts of the debtors' personal circumstances, have allowed gambling debt to procced to discharge. This occurred, in one case, when a debtor was found by the court to be suffering from a bona fide, diagnosed gambling addiction. In another case, this occurred when the credit card company failed to perform even the most rudimentary investigation into whether the debtor it was issuing a credit card to would be able---or willing---to pay the debt back. In general, this question generally turns on an examination of whether a debtor truly intended to pay the debt back or not. Proving this intent is not always easy. It is easier for a debtor wishing to file bankruptcy to avoid having such debt in the first place, but the same could be said for virtually any of the types of debt which drive individuals toward bankruptcy. More and more states and other localities are allowing casinos to be built in their jurisdictions and approving other forms of legalized gambling. States, cities, and counties, like the individuals who reside within them, look toward gambling as a quick way out of difficult financial circumstances. For individuals, the flip-side of this coin is deeper debt and a greater likelihood of filing for bankruptcy. For states and other municipalities, the flip-side is, among the many social problems attributed to the presence of casinos and gambling in their areas, that, when a debtor files for bankruptcy, it becomes more difficult to argue that the debt they have incurred through gambling is simply wrong and should be nondischargeable. However, this is still a tricky proposition, and making that argument to a bankruptcy trustee or judge requires a skilled and experienced attorney familiar with the legal terrain surrounding the issue. If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation. Schedule a Free Consultation