Can Gambling Debts be Wiped Out in Bankruptcy?

As an experienced bankruptcy attorney, I get a lot of questions from clients about what debts they can discharge in bankruptcy. One of the most common questions I receive centers around gambling debts: “Can gambling debts be wiped out in bankruptcy?”

In short, the answer is a bit complicated, but the bottom line is that gambling debts can be discharged in bankruptcy under certain conditions. However, there are also important legal nuances that you need to understand before moving forward with a bankruptcy filing.

 

The Basics: Chapter 7 vs. Chapter 13

 

Before diving into whether gambling debts can be discharged, it’s important to distinguish between the two primary forms of bankruptcy: Chapter 7 and Chapter 13.

• Chapter 7 Bankruptcy is often referred to as “liquidation” bankruptcy.  If you qualify, it allows you to discharge most of your unsecured debts, including gambling debts and it does not require any repayment plan.
• Chapter 13 Bankruptcy, on the other hand, involves creating a repayment plan to pay off your debts over 3 to 5 years. With Chapter 13, gambling debts and other unsecured debts are not wiped out immediately as in a Chapter 7, but can be reduced or restructured through the repayment plan.  You do your best to repay what you can afford and at the end of the plan, any remaining debt is discharged by Order of the Bankruptcy Court.  Most of our clients in Chapter 13 only pay a percentage of their unsecured debt during the plan.

Dischargeability of Gambling Debts in Bankruptcy

Gambling debts fall under the category of “unsecured debts.” These are debts that are not backed by collateral, like credit card bills or medical debts. In theory, most unsecured debts can be discharged in bankruptcy. However, gambling debts are subject to certain restrictions, particularly if they are recent and the debtor’s gambling activity raises red flags.

Here’s where the legal complexity lies:

1. Recent Gambling Debts: Fraudulent or Undue Preference?

One of the most critical issues that can arise with gambling debts in bankruptcy is the timing of the debts. If you incurred large gambling debts within 90 days before filing for bankruptcy, the creditor may consider these debts “preferential” and attempt to have them disallowed. This is because the creditor could argue that you incurred these debts with no intention of paying them back—just before you filed bankruptcy to avoid paying them.

If you used credit cards or took out loans specifically to fund gambling activities, these debts might be subject to an adversary proceeding in your bankruptcy case. In such proceedings, the court will examine whether the debts were incurred fraudulently or with bad intent.  Fortunately, these adversary proceedings are rare and difficult for the creditor to prove as they must prove that you incurred the debt without the intent to pay it back.  Most gamblers are hoping to win and when they win, they intend to pay their debt back so this is difficult hurdle for the creditor to overcome.  Michigan is part of the Federal Sixth Circuit Court of Appeals which provided some guidance on how gambling debts can be treated in a bankruptcy case.  See my blog post on Gambling Debt and Bankruptcy which explores the court’s opinion In re Rembert,  and how it can help with gambling debt in a bankruptcy case.

2. Dischargeability in Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, gambling debts may be discharged if they meet the discharge requirements. However, this discharge will not be automatic, especially if you have incurred the debt through fraud or malicious intent. If the court determines that the gambling debt was incurred through fraudulent means (such as taking out a cash advance on a credit card with the intent to gamble and then filing for bankruptcy), that debt may not be dischargeable.  Again, timing and the amount is important here.  If significant debt was incurred shortly before the bankruptcy was filed and no attempt to repay the debt was made, the more likely the creditor may challenge the dischargeability of their particular debt.

Additionally, you may face challenges if gambling debts are tied to criminal activities, such as illegal gambling operations. These types of debts may be completely non-dischargeable under bankruptcy law.

3. Dischargeability in Chapter 13 Bankruptcy

In Chapter 13, gambling debts can be included in the repayment plan, and the debtor may be able to pay them off over time. The court will assess whether you can afford to repay the debts as part of the plan, based on your income and expenses. It’s essential to note that Chapter 13 allows more flexibility than Chapter 7, but it still comes with its own set of challenges.

4. Recent Gambling Losses: The “Bad Faith” Defense

Another important factor is the good faith of the debtor. If you have recently racked up significant gambling debts and immediately file for bankruptcy, the trustee or creditors may argue that you are acting in bad faith by trying to wipe out debts incurred through gambling. Courts will scrutinize the timing and amount of gambling activity and may take a dim view if it appears that you were trying to “game” the system.

5. Gambling Debts and Bankruptcy Fraud

In extreme cases, if it’s found that the gambling debts were incurred fraudulently or with an intent to deceive creditors, you could face serious consequences, including the denial of your bankruptcy discharge altogether. Bankruptcy fraud is a criminal offense, and those convicted can face fines, penalties, and even jail time.

What Should You Do If You Have Gambling Debts?

 

If you are struggling with gambling debts, you should consult an experienced bankruptcy attorney who can help assess your specific situation. A qualified attorney will review your gambling history, advise you on the best bankruptcy path, and make sure that your debts are treated properly under the law. Importantly, your attorney will ensure that you are not inadvertently committing bankruptcy fraud or acting in bad faith.

Can Gambling Debts be Wiped Out in Bankruptcy?: The Bottom Line

 

While gambling debts can be discharged in bankruptcy, there are significant factors to consider, especially if the debts are recent or incurred fraudulently. The timing, amount, and intent behind the gambling debts will all play a role in determining whether they can be wiped out in your bankruptcy case.

If you find yourself overwhelmed by gambling debt, don’t hesitate to reach out to a bankruptcy lawyer. Your attorney can provide personalized guidance and ensure you make informed decisions about your financial future.

Remember, bankruptcy law is nuanced, and you deserve a clear, honest assessment of your options. With the right legal help, you can navigate through this complex process and get the fresh start you deserve.