A debtor in a bankruptcy case had been romantically involved with a woman years before filing for bankruptcy. He needed money and asked the woman to lend him $30,000. The woman agreed and asked him to write up a list of his property. He did so, and the woman’s attorney prepared a loan agreement and attached the debtor’s property list. The list included personal items and items from the man’s landscaping business. Five years later, the debtor had repaid less than $5,000 before he defaulted. The woman then sued the debtor and secured a default judgment for $137,030.78.
The debtor then filed for Chapter 7 bankruptcy. The woman filed an adversary proceeding against the debtor, asking the court to declare the debt non-dischargeable. She argued the debt was exempt from the debtor’s dischargeable debts under 11 U.S.C 523(a)(2)(B). The debtor moved to dismiss her claim. The woman then attempted to add a claim under 11 U.S.C. 523(a)(2)(A). The court dismissed the woman’s claim, and she appealed.
Discharges in Bankruptcy Claims
Not all of a debtor’s debts are discharged (releasing the debtor from personal liability) in bankruptcy cases. In a Chapter 7 bankruptcy case, there are certain kinds of debts that are excepted from discharge. That means that the debtor still has to repay those debts after bankruptcy. For example, debts for child support and alimony cannot be discharged, as well as most student loan debts (unless undue hardship is proven through a separate proceeding). Some of the non-dischargeable debts apply automatically, while others have to be requested by creditors in order to be exempt.
Two of the exceptions related to making false statements are the exceptions under 523(a)(2)(B) and 523(a)(2)(A). Under 523(a)(2)(B), a debt is non-dischargeable if it is obtained through the “use of a statement in writing” that is “materially false,” it concerns the debtor’s “financial condition,” the creditor relied on the statement, and the debtor made it with the intent to deceive. Under 523(a)(2)(A), a debt is exempt from discharge if it is obtained through “false pretenses, a false representation, or actual fraud, other than a statement” concerning the debtor’s “financial condition.”
The Court’s Decision
In this case, a federal appeals court held that the woman’s claim was properly dismissed under 523(a)(2)(B) and that the court properly denied her motion to amend her complaint under 523(a)(2)(A). The court held that the 523(a)(2)(B) claim was subject to dismissal because the list of assets was not materially false. The woman claimed that the debtor made a false statement by not stating that at least one of his vehicles for his business had a lien. However, there was no evidence that he was required to state any encumbrances or that she asked him to do so.
Concerning the 523(a)(2)(A) claim, the court found it was also properly dismissed. The court found the debtor did not make any affirmative misrepresentations. Again, the debtor was never asked if the listed items were encumbered. Accordingly, the woman’s claim was dismissed, and her loan was subject to the debtor’s discharge in his bankruptcy case.
Are You Considering Bankruptcy?
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More Blog Posts:
Bankruptcy Claim Rejected After Debtor Fraudulently Undervalued Real Estate Interest, Kentucky Bankruptcy Lawyers Blog, published April 6, 2017.
Debtor Refuses to Provide Tax Returns After Receiving Discharge, Court Finds Revocation of Discharge Is Appropriate, Kentucky Bankruptcy Lawyers Blog, published April 27, 2017.