Decision Alert: Credit Card Debt Dischargeability 

by Judy D. Thompson

A recent Fifth Circuit decision, AT&T Universal Card Servs. V. Mercer (In Re Mercer), 2001 U.S. App. Lexis 4522 (5^th Cir., 2001), sheds light on the standards necessary to block the discharge of a debtor who has run up excessive debt on a credit card. The Court pointed out that for non-dischargeability purposes, there is no statutory basis for distinguishing between cards obtained at the debtor’s initiative and those obtained in response to a solicitation. Each use of a credit card by a debtor is a representation of an intent to pay the charges. The appropriate focus with respect to a debtor’s intent is whether he or she acted in bad faith by knowingly making a false representation. The card-use representation of intent to pay is false if there is use without that intent.

Courts have listed various factors to consider in determining whether the card-user’s representation was made with the requisite scienter: the time between card-use and the bankruptcy filing; whether, prior to card-use, an attorney was consulted about bankruptcy; the number of charges; the amount of charges; the debtor’s financial condition at the time of card-use; whether the card limit was exceeded; whether multiple charges were made on the same day; whether the debtor was employed; the debtor’s employment prospects; the debtor’s financial sophistication; whether her buying habits changed suddenly; and whether luxuries or necessities were purchased. But the Court also pointed out that these factors are nonexclusive; none is dispositive, nor must a debtor’s conduct satisfy a minimum number to constitute fraudulent intent. The debtor’s financial condition at card-use is only one of many factors to consider, and should not be the sole basis for finding fraudulent intent. Hopeless insolvency alone cannot form the basis for fraudulent intent. The Court said that the inquiry on the debtor’s intent should focus on the debtor’s subjective intent, with "hopeless insolvency" (such as the Court reference to its Boydston opinion, Sears, Roebuck & Co. v. Boydston (Matter of Boydston), 520 F.2d 1097 (5^th Cir. 1975)) simply being "evidence from which his lack of honest belief may be inferred." Accordingly, "hopeless insolvency," or inability to pay, at card-use may support a finding the debtor did not intend to pay, but only if the debtor was aware of his or her financial condition and knew that he or she could not (and therefore did not intend to) make even the minimum monthly payment to the issuer. In the Mercer decision (involving a debtor with a gambling problem), one relevant inquiry is what the debtor intended to do with any winnings. Did the debtor intend to use them to pay her card-debt, or to finance more gambling?

As for the element of actual reliance, a credit card issuer usually will be able to establish actual reliance by showing it would not have approved the loan in the absence of debtor’s promise to pay (through card-use).