Can I File Chapter 7 Bankruptcy on My Gambling Debts?
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The answer is, as often in the law, it depends. Bankruptcy MAY BE an option, but it is not guaranteed.
Bankruptcy: the very BIG Picture
Under the US Bankruptcy Code—the nuances of which are beyond the scope of this article--the following applies to personal bankruptcy:
(1) For individuals, there are two types of bankruptcy. The first is Chapter 7, or liquidation, where your non-exempt assets are sold and the proceeds used to pay creditors; any remaining debts are "discharged," or wiped out. The second choice is Chapter 13, also called a "wage earner's plan", in which a very strict, court-approved, multi-year budget is developed. You pay what you can afford over a 5-year period--and after which, any remaining amounts or debts are discharged.
(2) Of the two types of personal bankruptcy, Chapter 7 is usually the more popular one, since it lets debtors get a fresh start financially-- more-or-less immediately-- and move on with their lives, instead of scrimping and sweating for years, as they try to pay down debts within the court-ordered "plan."
This article will specifically focus on Chapter 7 bankruptcy and gambling debt.
A bet or wager is a contract (read our article on "Enforcing Gambling Debts") between the two parties (e.g., between the casino and the gambler).
Gambling debts are debts which arise from a contract. They are in principal no different than the amount you owe a contractor for home renovations pursuant to the contract for the renovations, or an amount you owe your cell phone or internet provider under your service agreement(s). That means that anything that works against other contractual debts would work against gambling debts, and one such thing is Chapter 7 bankruptcy: contract-based debts, including gambling debts, can be discharged in Chapter 7.
So broadly speaking, the answer is "Yes--gambling debts are dischargeable in Chapter 7."
Gambling debts obtained through fraudulent activity
If you are eligible for bankruptcy in terms of income, assets, and amount of debt, but the debt was for money obtained by fraud however, you may not receive a discharge of the gambling debt in Chapter 7. If the debt was obtained under 11 U.S.C. 523(a)(2):
"(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition; [or] (B) use of a statement in writing—(i) that is materially false; (ii) respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive. . . ."
In short, if it can be shown that you obtained the loan for the money under false pretenses-- lied in some fashion in the process of incurring the debt-- you cannot discharge it. Chapter 7 does not allow you to deliberately cheat someone and use bankruptcy to avoid repaying credit extended to you in good faith (including by a casino) and which you only received because you lied about your ability or intention to repay. It stands to reason: that if you could not be denied a bankruptcy discharge for this reason, bankruptcy would become a license to commit fraud--lie to get credit, then file bankruptcy when it is time to repay.
How it works: To get credit at a casino, you'd have to sign a "marker" (basically, a promissory note or IOU) in exchange for the chips or tokens to play a casino game. Casinos don't just give markers to anyone. Customers must fill out a credit line application that includes financial information and your credit history. If you lied intentionally on the application about your income or assets in order to take out the marker, that would be obtaining a debt under "false pretenses" or by a "false representation," and/or by providing false documents relating to your "financial condition." Falsely representing your financial situation disqualifies you from using bankruptcy to discharge your gambling debts.
Sometimes it is easy to prove a gambler's fraud. For example, the gambler provided bank statements or pay stubs as evidence of his or her savings or income. Later it was shown that the statements were doctored or altered. Similarly, even without documentation, if someone, in applying for credit, asserted that they make $150,000 per year when in fact they make 1/3 or 1/2 that, it is easy to show fraud.
However, proving fraudulent misrepresentation of assets and income can be more difficult if the misrepresentation was more subtle. In those cases, even if the debtor did in fact lie about his/her finances to take out the credit, if the inaccuracies cannot be proven, the debtor will be allowed to discharge the debt they incurred for gambling. That said, the Bankruptcy Code can provide a bit of help for the creditor, including a casino. Under the Code, if the casino received IOUs for gambling within 90 days of filing bankruptcy, the courts will see this as evidence you never intended to repay. The presumption is, you ran up your gambling debt knowing you would soon be filing a Chapter 7 bankruptcy.
Honest mistakes: Honest mistakes --or changes in circumstances--do not disqualify you from using bankruptcy. If someone filed for a $5,000 tax refund in good faith and was relying on that to pay the debt, but made an error on their tax return, voiding the refund, that does not constitute fraud. Or if someone could have afforded to pay the marker when he or she took it out with the intention to repay the IOU, but then lost his or her job, that is not fraud. In cases like these, the debtor should be able to use Chapter 7 to discharge the gambling debt.
That's the reason why the answer to whether you can use Chapter 7 to discharge a gambling debt is "maybe"--it depends on the circumstances under which you incurred the debt, and whether at the time you did, you were committing fraud.
Gambling debts secured by your property
Chapter 7 filing doesn't work very well against "secured" debts. A secured debt is where the debt and obligation to repay is backed-up by some of your property or assets. Everyday examples of secured debts include mortgages and car loans, where if you don't pay, the lender can foreclose on your home or repossess your car.
The reason Chapter 7 doesn't work well against secured debts is that it does not wipe out the security interest. If the debt is not paid, the lender can repossess the property and sell it to cover the unpaid debt. If your home or car secured your gambling debt, then the gambling operator who advanced or loaned you the money can take the "security" to pay your debt.