Discharging Gambling Debt

Background

On May 14th 2018, the U.S. Supreme Court struck down a 1992 federal law (the Professional and Amateur Sports Protection Act) that had prohibited most states from authorizing sports betting. In short, the Court ruled that the federal law was unconstitutional because it encroached on states’ rights to control their own state policy. As Justice Samuel Alito wrote in the 6-3 opinion, “The legalization of sports gambling requires an important policy choice, but the choice is not ours to make… Congress can regulate sports gambling directly, but if it elects not to do so, each state is free to act on its own."

This means that, unless Congress decides to enact some federal regulation (law) on sports betting, each state is now able to allow sports betting or to create their own regulations on it. This comes as great news for many states, such as New Jersey, who see it as a boom for their economy as it will increase tourism and state taxes.

Sports betting and gambling doesn’t necessarily lead to addiction or financial problems. For some people, it is merely a fun pastime. For others, a couple of bets (and losses) can snowball into more and before they know it, gambling debts and other debts begin to mount. Collectors may begin calling, lines of credit are no longer extended, and bankruptcy seems to be the only option… But is it an option?  

Discharge of Gambling Debt in Bankruptcy

First, let’s review the two kinds of bankruptcy: Chapter 7 and Chapter 13.

Chapter 7: Under Chapter 7 bankruptcy, also referred to as “liquidation”, the trustee takes control of your non-exempt assets and sells them to repay your unsecured creditors. After that, the court discharges whatever debt remains.

Chapter 13: Under Chapter 13, you work with your creditors and the court to create a debt repayment plan. Generally you’ll pay all of your disposable income toward your creditors. At the end of three to five years, the court will discharge your remaining debt.

The good news: There is no law that specifically prohibits the discharge of gambling debt. The not so good news: The court does look at gambling debt differently than most other types of debt. Namely, the court will closely examine whether you incurred your gambling debt under false pretenses or through fraud. This is because if you do that, it looks like you never intended on paying the debts back. As long as you can prove you intended to pay your debts back and tried to do so, your gambling debt will be considered dischargeable.

Secured vs. Unsecured Gambling Debt

If you took out personal loans or lines of credit in order to gamble, your debt is unsecured and it can be discharged through Chapter 7 or Chapter 13. However, if you borrowed against the equity in your house, car, or other valuable asset, your gambling debt is secured and the lender may be able to claim the collateral (ie your house, car, or valuable asset) as repayment for the debt. This is where it can get more complicated; if your other lenders (such as your mortgage or car loan provider) still hold liens on the property, they may claim that property and force the gambling debt lender to convert your debt to unsecured debt.   

Summary

Gambling debts do not have to destroy your financial well-being. With the guidance of an experienced bankruptcy attorney, you should be able to discharge your unsecured gambling debt and start fresh.