Vanderbilt Law Review


Craig A. Bruens

First Page



If credit card-holders purchase items they cannot afford, they may make minimum payments and avoid default. Most people carry debt on their credit cards,' and card-issuers who profit from interest on these balances encourage consumers to carry a balance. When a debtor acquires too much debt and files for bankruptcy, the debtor may generally discharge all of his debts to gain a "fresh start." This discharge of debts completely bars creditors from collecting the money owed to them, and the resulting losses have frustrated the credit card industry.

To prevent debts from becoming uncollectible due to discharge, credit card-issuers frequently claim "fraud," alleging that a debtor used his credit card with the intention of filing for bankruptcy and discharging the debt. Card-issuers bring such claims under section 523(a)(2)(A) (the "fraud exception") of the Bankruptcy Code ("Bankruptcy Code" or "Code") which excepts from discharge those debts obtained by false pretenses, false representations, or actual fraud. Upon proving that a debt is excepted from discharge, a card- issuer may collect that debt after the debtor obtains a discharge.

Historically, courts have struggled when determining whether a credit card-holder committed fraud under section 523(a)(2)(A). To overcome conceptual dilemmas, courts have created different theories for analyzing credit card debt under the fraud exception. Some courts have recently discarded these credit card theories and have applied the common law of fraud to determine the dischargeability of credit card debt. The common law of fraud primarily differs from the credit card theories in that the common law requires the credit card-issuer to prove a debtor's subjective intent to defraud and to show the creditor's own "justifiable reliance."

Commentators have questioned the propriety of using the common law standard to evaluate modern credit card transactions." Additionally, the common law standard conflicts with a recent proposal to Congress by the consumer credit industry advocating an expansion of section 523(a)(2)(A) to except from discharge any debt incurred without a reasonable expectation of repayment. This proposal, precipitated by a record number of personal bankruptcies in 1996, is merely a means for consumer creditors to recover losses from bankruptcy without changing their lending practices.

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