What Is a “Fraudulently Incurred” Debt?

Which Debts are “Fraudulent”?

The discharge—legal write-off—of a debt can be challenged if at the time the debtor received the credit — the “money, property, services, or an extension, renewal, or refinancing of credit”—it was a result of his or her intentional misrepresentation, and the creditor relied on that misrepresentation in extending the credit. (See Section 523(a)(2) of the U.S. Bankruptcy Code.)

The misrepresentation can be made by the debtor in writing about the debtor’s financial condition—most commonly an intentionally inaccurate and misleading credit application—or it can be about anything that will persuade a creditor to extend the credit. The most common unwritten misrepresentations involve debtors using credit cards for major purchases or cash advances within a relatively short time before filing bankruptcy while intending not to pay the debt being incurred.

Debts are NOT considered fraudulent for bankruptcy purposes if a debtor simply could not meet payment obligations after the debt was incurred, such as making promises to pay under pressure during the collection process and then not doing so.

Creditors’ Strict Deadline to Complain

If a creditor believes that a debt was fraudulently incurred, it must make a timely challenge or forever lose its right to do so. That deadline is very quick—usually within 60 days of the “meeting of creditors.” That challenge must be done through an “adversary proceeding,” a lawsuit filed against the debtor specifically to determine whether the debtor’s actions fit within the definitions stated in the law. If a creditor is provided appropriate notice of the bankruptcy case, and it does not file an adversary proceeding by the stated deadline, it can’t ever do so.

If a creditor does make such a challenge, it has a relatively high hurdle in winning that challenge. It has to present evidence that will convince a bankruptcy judge to declare the debt not discharged because the debtor’s misrepresentations. The creditor also has to consider whether its attorney fees and other costs are worth the risk of not winning the case. And although these costs can often be added to the balance owed if the creditor does win, even then it also has to weigh whether it will likely be paid even if it wins. Finally, the creditor has the risk that it will have to pay the debtor’s attorney fees to defend the lawsuit if it loses and “the court finds that the position of the creditor was not substantially justified.” ( Section 523(d) )

If you are concerned about being challenged by any of your creditors this way, I would be happy to review you debts and advise you about your legal alternatives. At the office of bankruptcy attorney Carrie Weir, I provide a free initial consultation to anyone with questions or concerns regarding a bankruptcy filing. Please reach me at my office by using the contact form here or by calling me at 972-772-3083 to arrange a private meeting. With offices in Rockwall, Texas, I represent clients in Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.

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