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Do gambling winnings or losses need to be disclosed in bankruptcy?

When a Debtor files for personal bankruptcy, there are many schedules and statements that they are required to complete.  One such statement is something called the statement of financial affairs.  On this form, there are two questions that relate to gambling activity, one relative to winnings and one relative to losses.  More specifically, question #8 asks the Debtor to list all losses from fire, theft, other casualty or gambling for the period of one year immediately preceding the filing of the Debtor’s bankruptcy case.

Question #2 on the statement of financial affairs requires a debtor to state the amount of income received by the debtor other than from their job during the two years immediately preceding the commencement of the bankruptcy case.  On its face, this question requires the disclosure of all income of the debtor other than from an occupation. Not surprisingly, bankruptcy courts have routinely construed the expansive language of Question #2 as requiring the disclosure of income from gambling and have punished debtors who failed to disclose such income.

Regardless of whether a debtor has generated a significant portion of their income from gambling activity, or their losses in many cases due to serious addictions can result in a line of questioning during a debtor’s Section 341, Meeting of Creditors by the Bankruptcy Trustee.  This is the Trustee’s opportunity to dig a little into the real reason for the bankruptcy filing, or whether there are assets that can be administered for the estate to pay off creditors.

With respect to winnings in a casino, dog or horse track, or other gaming venues, those winnings play a large part in how the bankruptcy case moves forward.  When a debtor either fails or refuses to properly disclose information to the Bankruptcy Court, it can lead to their case being challenged under the good-faith requirement and may even lead to a denial of a discharge order and in the most egregious matters even criminal prosecution for hiding assets from creditors and the bankruptcy Trustee.  For example, if a Debtor were to win $50,000 at a casino, but fail to disclose the cash, most of which can not be exempted then concealing his or her gambling income, would hinder the bankruptcy trustee and buy the debtor time to spend the winnings.  This could lead to the filing a complaint for non-dischargeability or even criminal charges.  If a creditor or Trustee demonstrates by a preponderance of the evidence that the debtor actually intended to hinder, delay, or defraud a creditor, the court can deny the discharge. The intent to defraud must be actual and cannot be constructive; however, because it is unlikely that the debtor will admit actual fraud, the intent may be established by circumstantial evidence, such as failing to list income generated from a casino.  However, the problem that arises for Trustee’s in many situations with frequent gamblers is proving a substantial amount of money won at a casino or several casinos.   Large gains are not a problem when derived from single “hits”: A casino has an obligation to provide a form1099 for that longed-for but seldom realized experience or a large win.  It is the pattern of the ebb and flow of a gambling addiction, and the documents required to record hat tide, that are at issue.  Moreover, if a debtor is playing table games, and they win $1,000 here, $500 there, but over the course of a few months or even a year, generate a large portion of their income from gambling activity, they must tell the Trustee of this.

Where this becomes especially interesting is in a Chapter 13 reorganization.  The reason for this is that a Debtor has a duty to propose a plan payment based upon 100% of their disposable income.  The 2005 Amendments to the Bankruptcy Code changed the definition of “disposable income”.  Congress changed the definition of “disposable income” by tying it to a new term, “current monthly income,” and adding the definition of “current monthly income” that in relevant part, as noted above, looks at the debtor’s six-month pre-petition income.  The result is that a Chapter 13 plan payment will no longer be determined on disposable income as of the date of filing the Chapter 13 case but on all income as of the date of filing and any “projected disposable income”.  What does all this mean? The Trustee and the courts in dealing with a Chapter 13 case have awoken up to the fact that they can and will require a Chapter 13 Debtor to provide for and hand over any and all project income that they anticipate receiving in the life of the plan.  If a debtor generates a significant income from the use of post petition income based on winnings, then the bankruptcy estate may be allowed to benefit from this windfall and unsecured creditors can receive a higher dividend.  Carrying this approach forward, a Chapter 13 plan design must include tax returns, bonuses, raises, personal injury settlements, inheritances and etc. A debtor as well as their counsel must consider all of these factors in deciding to file a Chapter 13 case.

Certainly, Congress did not intend for debtors who experience a substantially improved financial condition after confirmation to avoid paying more to their creditors. Rather, unanticipated windfalls should inure to the benefit of the creditors, not the debtor.  It is not the design of the Bankruptcy laws to allow the debtor to lead the life of Riley while his creditors suffer on his behalf.  The Debtors’ use of post-confirmation income to gamble for personal entertainment while claiming that they cannot dedicate an additional funds per month in repayment of their creditors does not comport with the Court’s understanding of the philosophy of Chapter 13 reorganization.

The purpose of bankruptcy is to provide equitable distribution of the debtor’s assets to the creditors and “to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Williams v. United States Fid. & Guar. Co., 236 U.S. 549, 554-55, (1915)  If a debtor does not disclose his or her winnings, a court could find that debtors’ failure to identify the gambling winnings and losses that they incurred in the appropriate periods leading up to their bankruptcy filing was knowing and fraudulent for purposes of § 727(a)(4)(A). Moreover, the fact the gambling winnings are not disclosed can be taken as evidence by a court that the debtor intended to defraud his creditors.

What is a Casino Marker and is Casino Credit dischargeable in Bankruptcy?

Casino Marker to incur debtCertain people who like to gamble go into the casino with a specific amount of money that they believed before-hand would be all they would use to play.  However, for one reason or another, they make the ill-fated decision to request a credit line from the casino called a “Marker”.  Casino markers are lines of credit that allow frequent gambling clientele easy access to substantial sums of money to use at the table games or slots in a casino.  Casino markers are short-term, interest-free loans. However, repayment must be prompt or the patron faces high interest fees and possible criminal charges.

In general, a player will apply for casino credit by completing a standard form setting forth the name of the applicant, his or her address, the name of the applicant’s bank, and the bank account number. Casino personnel approve the applications pending verification of the basic bank information, including the average balance of the applicant’s account.  A marker is a gambling credit instrument that allows a gambler to receive all or part of the credit line the casino has approved for him, based on the gambler’s prior credit application with the casino. Once the gambler and a casino representative sign the marker, the gambler may exchange the marker for gambling tokens, or chips. If the gambler does not pay the marker when he has finished gambling, the marker is outstanding and the casino may later submit the marker, like a check, to the gambler’s bank for payment.

If the marker remains outstanding, casino personnel attempt to notify the customer and, after a specified period of time, submit the marker to the applicant’s bank for collection. If the bank account does not have sufficient funds, the casino will again attempt contact the customer and make demand for payment.  If payment is not forthcoming, the casino has the option to refer the customer for possible criminal prosecution, similar to passing a bad check.  However, it should be noted that so long as you file for bankruptcy before any criminal complaint is made, the automatic stay would stop the claim from commencing, as the Bankruptcy code stays any attempt to collect a prepetition debt during the course of a bankruptcy, pursuant to 11 U.S.C. §362(a).

Many pathological gamblers will seek to discharge the over extended marker or credit lines they have obtained in a casino just like a cash advance at the ATM in the casino through a Chapter 7 bankruptcy filing.  However, in some situations, a casino will challenge the ability to discharge the credit line through an adversary proceeding due to false pretenses, or if the debt exceeded $750 with in 90 days of the bankruptcy filing, pursuant to 11 U.S.C. §523(a).  Relative to casino markers, as with a cash advance, the key question is did the gambler have the intent to repay the debt at the time they took out the marker?

Since a casino marker is generally charged against a future check from the Debtor’s bank account, a casino may argue fraudulent misrepresentation to the casino of the Debtor’s ability to repay the loan, if they did not have the money in their bank account at the time they took out the marker.  However, the terms “false pretenses” and “false representation” are equivalent to “actual fraud,” as these terms are used in 11 U.S.C. § 523(a)(2)(A) A debt based solely on an unpaid check is nondischargeable (if at all) only as a debt arising from willful and malicious injury under 11 U.S.C. § 523(a)(6).  Moreover, a creditor casino has the burden to prove that the debtor intended to injure or harm the casino when taking the marker in order to obtain an order for non dischargeability.

Can cash advances from casinos be discharged in Bankruptcy?

Many people who visit a casino’s go in with simple intentions of only gambling a certain amount of money. For example, they say to themselves, “I will take $500 with me and if I loose it, I will stop gambling? Unfortunately, their addiction to gambling takes over when they start loosing and their pathological gambling takes over. What happens next? They go to the ATM machine and put in a credit card to take a cash advance, as their bank account does not have enough money to gamble based upon the desire to “win back” their losses. The great tragedy is that this type of transaction typically occurs numerous times in a given night or even over several days and many credit cards have $600, $1,000 or even more debited from the credit lines, which more likely then not, will be lost to the dealers and pit bosses running the games.

When a Debtor finally makes the decision to file for bankruptcy, and they review their credit reports, the question needs to be asked, can they discharge the debt on the credit cards for those past cash advances just the same as if they had purchased a product or service using the credit card? The second question to ask is if they can discharge the cash advance, do they need to wait a certain period of time to do so.

When cash advances aggregating to more than $925 obtained by debtor within 70 days of filing for bankruptcy, the debt may be deemed non dischargeable, but the creditor has to prove to the court that there was no intent to pay back the debt or that the debt was incurred as a result of false pretenses at the time the cash was withdrawn from the ATM. In light of recent case law, such a demonstration is more difficult then it use to be due to the fact that the creditor has to show subjective intent and not just an inability to pay. An easier way to look at this is to consider that all cash advances are dischargeable unless a creditor objects to them in an adversary proceeding, which can be very expensive for the Creditor. Years ago, casinos and credit card companies often sought to object to discharging extensions of credit given to debtors at the casino. However, in light of recent case law and the extensive cost of protracted litigation this does not happen nearly as often any longer.

Some bankruptcy courts have adopted an “implied representation” theory, under which the use of a credit card is an implied representation to the issuer of the holder’s intent and/or ability to pay.  GM Card v. Cox, 182 B.R. 626, 633 (Bankr. D. Mass. 1995). Other courts have adopted an “assumption of the risk” theory, which provides for the discharge of credit card debt incurred before the issuer communicates to the holder that it is revoking the card . Still other courts have adopted a “totality of the circumstances” test, sometimes in conjunction with an implied representation theory. &

It should be noted, that many bankruptcy attorneys will ask the question, when was the last time you took a cash advance? If the answer is with in 70 days, many attorneys will advise their clients to simply wait out the look back period before filing. This does become problematic when the Debtor is facing a foreclosure, wage garnishment or other serious legal consequence that requires the automatic stay to prevent a judicial proceeding from moving forward.

Debt Free in 2014? How to get there

Debt is a stress in life that will never go away until you decide that it will.  The power is all in your hands and not in the power of outside sources.  You must decide what steps you need to take to get debt free and start living a financial healthy life style.

It is hard to take the plunge into dealing with debt due to the crazy life style this economy has put us all in.  Most people live in fear of not knowing that they will have a job tomorrow or if they will find a job tomorrow that will afford them of paying off their debt.  These fears only paralyze a person from ultimately dealing with the debt issue immediately which means that the stress of debt will linger for years and not months or days.

The tragic outcome for most people who are paralyze with debt and do nothing is a lifetime of debt issues that a person may not be able to shake.  These are tax liens, tax levies, judgments, judgment liens, garnishments or student loan defaults.  Many people deal with debt when it is a little too late and as a result the fore mention become reality which limits your ability to have a full recovery of debt and have financial health.

So what should you do if you plan to be debt free in 2014?  The first step is planning how to deal with your debt. A lot of people say to me that they do not what to file bankruptcy because their life will be over.  I am not sure why anyone would think that is the case because that statement is totally untrue.  However, bankruptcy is not the only way to deal with your debt.  It is the best solution for a quick and clean way of getting the financial health you seek.

If not bankruptcy, you can consider working out your debt by debt settlement.  If you have credit card debt only, you might be able to resolve your debt by settling the outstanding balance with your credit card company for less than you owe.  Another option is if you owe tax debt, you might consider an offer in compromise, like debt settlement, the IRS or state may settle your tax debt for less than you owe.

Irrespective of any of these choices, the key to success is making a plan to accomplish your goals in 2014.  You should start today and not wait until January 2014 to make a plan for you want to be debt free in 2014 and not 2015.  Any of these choices you chose to deal with your debt will take time to prepare and to save to pay for.  Each one of these steps will cost you some money to execute but the amount for the service will be minimiumal compare to the amount of debt you need to resolve.

I know this all sounds great but those fears are creeping in and you like to put off planning.  I will give you one demonstration why you need make a plan to deal with debt.  If you owe $15,000.00 on credit card debt and your interest is 10%, each month you are losing $125.00 a month of your income.  We all know that 10% is a low interest rate for credit cards with a balance of $15,000.00 but you get the point.  The longer you wait to deal with debt the more money you will lose over time.

So do not let your fear paralyze you and stop you from making a plan.  Remember plans do not have to be completed in a day or two but can be completed over months.  I would suggest that you meet with an attorney to discuss your options and develop a plan to deal with your debt.  Attorneys who have the proper experience will be able to help you with any type of debt issue or options.  I do not recommend an attorney or a nonprofit debt settlement company that only can provide you with one of the options to consider.  Your time is limited and you want a professional that can see your entire debt stress and give you all the options in one location.  Besides, attorneys with one ability or a debt settlement company with one option will push you into the direction of their limited ability because that is all they know.  Understandable but your financial health needs the proper attention.

So, start getting your plan for 2014 and begin living a financially healthy life style for your future.