How is gambling debt treated in bankruptcy?
In general, gambling debts are dischargeable in bankruptcy. But, gambling debt could sometimes be determined to be non-dischargeable depending on the circumstances.
I’m going to discuss some of the problems that a gambler might face in bankruptcy, and later in this video, some proactive steps that a gambler should take before filing bankruptcy.
There are reports that over 20 million people in the US incur an average debt of over $50,000 due to gambling, thinking they’re going to hit the big one to pay off their debts.
It is estimated that over 20% of compulsive gamblers file for bankruptcy.
The odds of winning through gambling to repay debts is very low.
Obsessive gamblers usually spend their regular income, then take it to the next level by borrowing money from casinos, credit cards, retirement accounts and personal loans to fund their gambling problem.
Gamblers seeking to file bankruptcy are subject to the following rules:
Just like regular income, the bankruptcy code requires gambling winnings and losses to be reported in a bankruptcy petition. Gambling also includes playing the lottery.
Gambling WINNINGS represent “other” income and that income must be reported during the year of the filing of a bankruptcy petition, and also during the 2 previous years of the filing date.
Gambling LOSSES incurred in the year prior to the bankruptcy filing must also be reported in a bankruptcy petition.
Any repayments made for gambling debts to friends, family, casinos and other gambling related creditors within 1 year of the bankruptcy filing date must be reported.
Any large asset transfers, including real estate, jewelry, or other large assets used to repay a gambling debt must be reported, and those transfers can be reversed by the trustee and the asset seized and sold by the trustee to pay back creditors.
A debtor that doesn’t report the required gambling winnings, losses, payments and asset transfers that are subsequently discovered, could be charged with bankruptcy fraud and could go to prison and pay a huge fine.
After filing bankruptcy, the US Trustee’s office can question a debtor under oath at the creditor meeting about their gambling habits to investigate whether the debtor had any intent on repaying gambling debts or other creditors.
The trustee can make a debtor produce bank statements, credit card statements, a casino card and other evidence that possibly proves abusive spending and incurring debt for purposes of gambling.
The trustee can look into public records, like real estate transfers, and question the debtor on a real estate transaction and make the debtor produce closing statements and other evidence of the transaction to evidence gambling debt repayments.
The trustee can look into vehicle transfers used to satisfy gambling debts.
If the trustee can prove that a debtor had NO INTENTION of repaying debt incurred as a result of gambling, then the debtor’s case can be dismissed for abuse of the bankruptcy code.
Credit card cash advances made just prior to filing, can be challenged by the credit issuer by filing of a complaint with the bankruptcy court objecting to the discharge of that debt if they can prove there was no intent to repay that debt due to obtaining the credit with the intent to file bankruptcy.
This can result in the debt not being discharged or a settlement with that creditor to pay a portion of the debt.
Sometimes, gambling debts can be determined to be “luxury goods or services”, especially if the debt was incurred very close to the bankruptcy filing date. That determination could also deem the debt nondischargeable.
Here are some of the positive things that can happen for a gambling debtor.
Some courts have listened to evidence provided by a gambling debtor showing that gambling was truly a diagnosed addiction to save their case from dismissal and allowing gambling debts to be discharged.
Creditors may be held to be negligent. If a credit issuer fails to investigate whether a person was even able to pay back the debt before issuing the credit, that fact could deem the debt dischargeable.
What proactive measures should be taken to help a gambler be successful in obtaining a bankruptcy discharge?
Excessive gamblers looking to file bankruptcy should recognize the problem, seek immediate help with their gambling problem and make an attempt to show a good faith effort to repay the debt.
Being proactive before filing could be enough to show the Court that there was no intent to avoid repaying the debt, thus providing a better chance to have the gambling debt discharged.
