Bankruptcy and Gambling Debts

If you are considering filing for bankruptcy and also have gambling debt, you may be wondering how that type of debt is handled in bankruptcy. Will it be discharged so that you can be rid of it? As with most things in law, the answer is “it depends.” Gambling debt is usually unsecured, non-priority debt. In bankruptcy, that is the type of debt that is most easily discharged. That is, it is not secured by any of your assets and it is not a “priority”debt like back taxes or child support that cannot be discharged. So, in general gambling debt can be discharged.

While that is good news, there is another side of the coin that must be considered. The debt will be listed on your schedules as unsecured, non-priority debt and, if the creditor does not object to the discharge, the gambling debt will be discharged just like credit card debt, personal loans, medical debt, and other types of unsecured debt. That may be a big “if” though. The creditor may in fact object to a discharge of the gambling debt. The basis of objection used by such creditors is that you did not have the means to repay the loan at the time the loan was made. This is considered a type of fraud and fraudulently incurred debt is not dischargeable in bankruptcy.

This type of fraud is generally easier to prove with gambling debt than with other types of personal debt. For example, with credit cards it is often years earlier that the credit agreement was signed. The credit decision was based on your debts and income at that time, not your debt and income as it stands now. (Note, though that if you run up your charges right before filing for bankruptcy, that may also be considered fraudulent and non-dischargeable).

If you have recently racked up gambling debts and are considering filing for bankruptcy, you may want to consider holding off for a few months. The longer ago that the debt was incurred, the less likely the creditors are to object to a discharge. The downside of course is that if you aren’t paying on the loans, the creditors are most likely going to take collection actions between now and your bankruptcy filing. That may still be the better option if filing now means that the debt isn’t discharged.

Also keep in mind that if you put up any of your assets as collateral for a loan (whether for gambling debt or otherwise), the lien against that asset remains valid. So, while you no longer have a personal obligation to repay the loan after discharge, the creditor can still repossess the asset backing the loan.