Betting on a Fresh Start? Gambling Debt Dischargeability in an Era of Online Sports Betting

By Connor D. Hicks

The U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA) on May 14, 2018.1 PASPA had largely made it unlawful for states to authorize sports gambling, leaving the “particularly addictive” and “strong[ly] oppos[ed]” practice legally available only in Nevada.2

Murphy v. Nat’l Collegiate Athletic Ass’n immediately legalized sports gambling in two states with anticipatory legislation already in place.3 Much of the rest of the nation followed suit, with sports gambling becoming legal nearly nationwide in the six years since.4 Thirty-eight states and the District of Columbia have legalized sports gambling, with two more states currently in the process of legalization.5 Of those 40 states, at least 31 (and the District of Columbia) will have legal mobile sports gambling by the end of 2025.6 Sports betting is here to stay, and will only continue to increase year-over-year.

The effects are readily apparent. An individual in a “legal state” can hardly watch a sports event without seeing offers for a “risk-free bet” from DraftKings, a “money-back guarantee parlay” from FanDuel and a “deposit match” from Caesars all within a few minutes. All are intended to get the first-time bettor hooked, increasing the platform’s user base and, in turn, their bottom line.7 While the prolific legalization of sports gambling might be lucrative for a very select few individuals and the states to have legalized it,8 this same widespread availability will undoubtedly reap harm to Americans who fall victim to the hobby’s addictive characteristics. These same individuals might turn to bankruptcy for relief.

However, the Bankruptcy Code prevents discharge of certain debts, and the idea “[t]hat gambling debt should be dischargeable in bankruptcy provokes strong reactions.”9 While not necessarily settled on a national scale before the mass legalization of sports gambling, this idea had general principles in place. How does near-national legalization impact gambling debt dischargeability, particularly in the few states left where the practice remains outlawed?

Gambling Debt Dischargeability Pre-Murphy

Section 523 of the Bankruptcy Code includes an extensive list of debts that are specifically nondischargeable.10 Although the Bankruptcy Act of 1867 provided that courts could refuse to discharge gambling debts,11 later versions included no such direction. While gambling debts — or more generally, any “illegal debts” — are not directly legislated as being exempt from the bankruptcy discharge, this does not prevent them from coming under other exceptions to discharge found in § 523.12

Debts obtained through fraud, as a result of “willful and malicious injury,” and for child-support obligations are expressly nondischargeable.13 Interestingly enough, Congress did not expressly legislate a broad exception to discharge for debts stemming from illegal activity or otherwise considered unenforceable by the nature of the unlawful conduct giving rise to them.14 As a result, while sports betting was unavailable in every state but Nevada (and any form of casino gambling was illegal in many states outside of tribal reservations),15 bankruptcy courts were forced to find alternative mechanisms to address the dischargeability of gambling debts, which were, by definition, illegal.

Courts inclined to follow public sentiment and determine that gambling debts were nondischargeable generally found basis for doing so under § 523(a)(2)(A). The In re Clagg court held that debts “for money ... or an extension ... of credit” were nondischargeable to the extent that those debts were obtained through “false pretenses, a false representation, or actual fraud.”16 More than three decades ago, “[c]ertain forms of gambling” were legal in Illinois, providing rationale for the conclusion that “there is no basis for treating a debt that arose from legal gambling any differently from other debts legally incurred.”17

As a result, the fact that a debtor with a “long history of gambling” sought to discharge “substantial gambling losses” financed through credit cards and a second mortgage was of consequence only as to whether he intended to repay the debt when it was incurred.18 The debtor argued that he not only intended to repay the creditor, but justified his continued problem with gambling through “his hope that [his] luck [would] turn ... and he could repay.”19 Like other debtors to have made the same argument before him, the court was unpersuaded, comparing the situation to a debtor running up credit card bills that he knew his salary could never cover, then seeking discharge.20 The court concluded that the debtor’s “hope to win at gambling” to settle his debts did not amount to a “requisite intent to repay.”21

However, wouldn’t most compulsive gamblers accumulating significant debt come within that same standard? Wouldn’t the unreasonable nature of the debtor’s belief that the solution to his gambling debts was to simply keep gambling until he won always preclude dischargeability? The answer is “not necessarily,” and several courts have come down on the other side of the determination.

The U.S. Bankruptcy Court for the Middle District of Florida in In re Landen was sufficiently persuaded by the debtor’s “honest but somewhat questionable belief that he would soon get lucky at gambling” to determine that the debts were not fraudulently incurred and thereby dischargeable.22 The U.S. Bankruptcy Court for the District of Kansas later noted that while bankruptcy does not inure benefits to “dishonest debtors,” it also does not serve to protect “foolhardy creditors.”23

This reasoning evolved into an analysis of whether the debtor, so overcome by gambling, had developed a genuine belief that he or she would soon “hit it big” to repay a creditor continuing to lend them money to gamble despite their losses. Just after Clagg, a different Illinois resident decided that the solution to his family’s dwindling finances was to take out a $16,800 line of credit from Citibank and book a flight to Vegas.24 As the U.S. District Court for the Northern District of Illinois — by no means mincing words — noted, “[p]redictably, he lost it all.”25

Why was this result so predictable? Because “despite the fact that he was a frequent gambler, [he] had never left a casino with a net profit.”26 The debtor’s own delusion allowed him to discharge the gambling debt. Again analyzing the exception to discharge for fraud under § 523(a)(2)(A), the court found the “critical fact question” to be whether the debtor’s “professed intention to repay Citibank was false.”27 Concurring with the bankruptcy court below, the court held that the gambling debts were dischargeable, determining that the debtor had a sincere intent to repay and in fact increased his wagers in hopes of winning back enough money to repay his debts.28 Most courts to address the question afterward have followed suit.

Dischargeability of Gambling Debts in States Where It Remains Illegal

Ultimately, this same standard prevails today (for the most part). Courts look to whether the debtor, no matter how disillusioned such a belief might be, genuinely believed that if he or she continued gambling, the misfortunes could be turned around. If the debtor with a long losing history genuinely believes so, the debt will generally be dischargeable.

Tasked with the question just months after Murphy, the U.S. Bankruptcy Court for the Eastern District of Virginia set the stage for the influx of gambling debt that was to come.29 The debtor, an individual residing in Virginia,30 obtained $20,000 in credit to gamble at a Maryland Live! Casino just across the state border.31 At the time of the debtor’s bankruptcy filing just 13 months later, he had more than $267,000 in unsecured debt, $17,336 of which was owed to the casino.32

The debtor objected to the casino’s claim, citing Virginia’s public policy against gambling,33 but the court was unpersuaded. Maryland’s gambling laws were not “so contrary” to Virginia’s public policy that they should be ignored and the debt deemed unenforceable.34 Citing more than $9 billion in profits from Virginia’s lottery operations and the Colonial Downs horse track slated to open just weeks later, the court rejected the debtor’s attempt and ordered the debt paid through the chapter 13 plan as any other unsecured debt.35 In fact, the court even clarified that (at least as to classification) “credit to gamble” is no different than “unsecured debt for other entertainment venues, such as concerts, movie theaters or season tickets for sports teams.”36

Other recent cases confirm the mass acceptance of a debtor’s honest subjective intent to hit it big and repay — no matter how unreasonable.37 How this may change in a more stringent state like Utah (a state with a Church of Jesus Christ of Latter-Day Saints-backed constitutional prohibition on all gambling and showing no sign of legalization anytime soon) is hard to guess.38 So, while the Tenth Circuit has determined gambling debt to be no different from any other “consumer debt” under the Bankruptcy Code, Utah bankruptcy courts may nevertheless rule otherwise.39 Hawaii also has similar prohibitions.40

However, palpable gambling losses implicate other Code provisions, as seen in In re Ferguson, where the debtor purportedly lost more than $70,000 gambling but was unable to produce evidence to establish where the money actually went.41 Without corroborating evidence, the court was not inclined to believe that the debtor was simply “incredibly unlucky” to the extent that such a sum merely went missing during a few casino trips.42 Sports gambling (unlike casino table games) avoids this problem entirely. Every wager is tracked, and for debtors in states with online gambling, a line-by-line accounting of their wins and losses sits in the palm of their hand. This might make a problem gambler cringe as the losses are incurred, but could culminate in a substantial enough amount of evidence to allow subsequent discharge in bankruptcy.

There is nothing to suggest that the analysis under § 523(a)(2)(A) has changed in any way post-Murphy. Rather, there only appears to be a shift toward additional acceptance of gambling (and discharge of debts related to it) that falls in line with most state legislatures. This acceptance was already underway, and Murphy merely provided a basis for its spread. Depending on the court, a pattern gambler who honestly believed that his or her next bet was the big one might rely on that belief — no matter how unreasonable — to discharge the gambling debts in bankruptcy.43

On the other hand, it has yet to be seen whether a debtor not falling within this scenario — who knows he or she is unlucky but does not care (knowing that a discharge is available) — would be subject to a different standard post-Murphy. However, there certainly appears to be no reason to characterize that scenario any differently than the prebankruptcy luxury spender.44

Conclusion

While the direct correlation between the legalization of sports gambling and the resulting bankruptcies might be hard to quantify, it is not impossible. A study in October 2024 found that “while the general accessibility to sports betting leads to insignificant changes to bankruptcy filing, online access significantly increases the likelihood.”45 On average, gamblers in states with online accessibility have lower credit scores, increased credit card delinquencies, more frequent debt consolidations and increased occurrence of bankruptcy.46

Nonetheless, the question remains regarding whether increased accessibility (and lax state restrictions) will prompt revisions to dischargeability. As sports gambling continues to creep closer to national legalization, only time will tell whether public sentiment will shift back toward disfavor. For now, “[a]s long as [a] debtor has an honest, even if unreasonable, belief that he will get lucky at gambling and pay off debt,” that might be enough.47

Aren’t all credit transactions — to some extent — a gamble,48 albeit generally with better odds?

Connor Hicks is a commercial litigation and restructuring associate with Taft Stettinius & Hollister LLP in Cincinnati.