Gambling is a form of entertainment for some, an addiction for others, and, for others still, a last resort when they are feeling financial pressure. The extent to which it affects lower-income people in larger proportion than higher-income people may be a root cause of an increased rate of bankruptcy filing, among many other causes, but the exact impact that gambling losses have upon the ability of a debtor who has decided to file bankruptcy to successfully have those losses discharged along with other debt is another matter entirely.
To begin with, all gambling losses in the previous year 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. 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. That is, undoing it and requiring the funds be returned from the transferee. In the case of gambling losses, such debt is “unsecured debt,” which is paid after secured debt, such as that owed to home mortgage and auto loan providers. Moreover, 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.
Beyond the initial filing of the petition and these powers of the trustee to undo transfers of funds that appear fraudulent, it is also highly probable that gambling losses, if not avoided by the trustee at the outset, 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 like a mini-trial on that specific issue within the bankruptcy court. It requires extra time and work for the debtor’s 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.
Some courts 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.
Clearly, 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 have gambling debt and are considering filing for bankruptcy, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.
