Fraud Judgments and Discharge in Chapter 7 Bankruptcy

Are Fraud Judgments Dischargeable in Bankruptcy?

Money or services that were obtained by fraud, false pretenses, or false representations may not be dischargeable. 11 USC 523(a)(2) states that a debt resulting from a judgment for false pretenses, false representations or actual fraud is not discharged in bankruptcy. Avoiding such a discharge, however, requires an adversary proceeding for the court to determine whether the debt is dischargeable under 11 USC 523(c)(1) prior to the discharge. Failure to do so may still result in this debt being discharged.

11 USC 523(a)
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition. 11 USC 523(a)(2)

11 USC 523(c)
Except as provided in subsection (a)(3)(B) of this section (where the debt is not listed in the bankruptcy filing with the judgment holder as a creditor), the debtor shall be discharged from a debt of a kind specified in paragraph (2) of subsection (a) of this section (false pretenses, false representations or actual fraud), unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2) as the case may be, of subsection (a) of this section.

When determining what qualifies, most holdings in prior cases generally track the fraud elements established by common law or state law fraud. These types of cases can involve come degree of complications. For example, if a debtor originally obtained the money at issue in a legal fashion but after the fact attempted to hide or conceal it from the creditor or attempted to mislead the creditor concerning what assets may be available for collection of due amounts, such a situation would not create a non-dischargeable obligation. Instead, if the debtor originally obtained the money by fraudulent circumstances, the debt would be non-dischargeable. The burden of proof is based upon a preponderance of evidence – notably less than the burden of proof required by common law and state law fraud cases. As a result, there is the potential that one could prove a debt is not dischargeable due to original fraud but not meet the burden of proof to establish liability for the fraud itself.

Most of exceptions to discharge in 11 USC §523 are often referred to as “self-executing” meaning that there need not be a separate adversary proceeding action by a creditor to determine whether the debt is discharged. There are four exceptions, however, of claims that are not self-executing. Those exceptions are related to debts incurred by fraud. Claims based on fraud are should typically NOT be discharged unless the creditor starts a timely adversary proceeding in the bankruptcy case. In such cases, the adversary proceeding must be brought within 90 days of the first date set for the creditor’s meeting. The clerk should fix this date at the time of the filing of the proceeding, and the date should be noted on the Bankruptcy Notice sent out at the start of the case – what is commonly referred to as the Section 341 Notice. The timelines and deadlines are going to be strictly enforced – even if there are continuances of the meeting.

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