How Fraud Makes Debt Non Dischargeable In Bankruptcy
Bankruptcy is intended to give people a fresh start. That’s why so many categories of debt are dischargeable, and so many are non dischargeable. In most cases, categories of debts that cannot be discharged are clear and precisely written. For example, things like student loans, child support or criminal fines are right there in the bankruptcy code.
Fraud and False Pretenses
But there is one category of non dischargeable debt that is much more vague and ambiguous. We’re talking about the category of non dischargeable debt that prohibits discharging debt that is incurred on the basis of false pretenses, fraud, or false representations.
As a general rule, debt that is incurred because the debtor made a false statement, or recklessly made a false statement without knowing whether it was true or false, can be fraud. That can turn an otherwise ordinary, dischargeable debt into one that cannot be discharged in your bankruptcy case.
How Fraud May Happen
This happens more often than you may think. Imagine that you fudge numbers a bit on a business transaction in order to get the deal to close. Or that you just take a “guess” at projected financials or accounts receivable related to the marketing and sale of a business, which ends up being incorrect. This could be seen as fraudulent.
Even off the cuff comments could be seen as fraud. For example, if you tell a contractor that you will pay them, knowing full well that you cannot afford to pay, you could end up being accused of fraud.
The same holds true with fiduciary duties. If you are an owner, shareholder in a smaller company, or an officer in a company, you owe fiduciary duties to that company. If you are sued, and the lawsuit alleges breach of fiduciary duties, that is fraud, and you could find yourself with non dischargeable debt.
The bankruptcy code expands fraud to also include anything that you do intentionally. So intentional misrepresentations, or lawsuits based on intentional conduct that result in a judgment, could also be seen as not dischargeable in your bankruptcy case.
Look at the Lawsuit
This is why, if you are ever sued, and the lawsuit alleges fraud in any capacity, it should be concerning. That fraud allegation, should you lose the case, or settle it, could turn what would otherwise be dischargeable debt into debt that now cannot be discharged. The question of whether you committed fraud lies with the party suing you—that is, what they allege in the complaint that they file against you.
You will not be able to relitigate the issue of fraud in the bankruptcy court. In other words, if you fight a fraud allegation in a lawsuit in state court, and you lose, when you file for bankruptcy, you cannot then defend the case again. You now have a judgment based on fraud.