Debts Obtained Through Fraud and Bankruptcy: Beware the Default Judgment!

Debts Obtained Through Fraud and Bankruptcy: Definition, Dischargeability, and Default Judgments


Debts Obtained through Fraud: The Bankruptcy Code & The US Supreme Court

The US Bankruptcy Code states that a debt obtained through fraud is not dischargeable in Chapter 7 or Chapter 13 bankruptcy if it is owed for money obtained through fraud. The US Supreme court has upheld even the non-dischargeability of a settlement of a lawsuit in which a complaint of fraud is alleged as owed "for money obtained through fraud." In short, although you must list all debts owed in your bankruptcy petition when you file it, some of those debts may not actually be discharged by the bankrutpcy, and "fraudulence-based" debts are one of those types. However, the question remains: what are debts obtained through fraud? The obvious answer is that, in the context of bankruptcy, a debt obtained through fraud is typically a judgment a creditor has received as a result of a lawsuit obtained against a person filing for bankruptcy in which fraud was alleged and a finding of fraud was found by the court issuing the judgment. That is the easy case. Most bankruptcy courts will not re-examine such a finding for judgment on the merits or on the facts, holding instead that that judgment is a final resolution of the dispute over whether a fraud occurred. Judgments debts of this sort are not dischargeable. The Supreme Court case referred to above makes it clear that debts arising from the settlement of such debts are generally also non-dischargeable, despite the fact that, as Justice Thomas points out in his dissent in the case, there are serious differences between settlements arising from "consent judgments" and settlements that don't.

Debts Obtained through Fraud: Default Judgments

Less obvious are default judgments granted a creditor claiming fraud in such a lawsuit because the defendant who subsequently files for bankruptcy simply did not respond or show up for the court hearing in that case. Some courts around the country still hold those default judgments to be final with regard to the issue of fraud and therefore non-dischargeable and some do not. To have a debt listed on a bankruptcy petition to be discharged, however, a creditor must file a lawsuit called an Adversary Proceeding in the bankruptcy court to contest the debt's dischargeability. Defense of these lawsuits can lead to a favorable settlement for the person filing bankruptcy or even from time to time a complete exoneration and discharge of the debt depending upon the circumstances. One thing is certain: if you are being sued and the party suing you has included a count of Fraud in their complaint, no matter how baseless and unfair it may be, it should be taken seriously. Some creditors' attorneys include such allegations in their collection lawsuit complaints specifically in an attempt to "immunize" them from a subsequent discharge in bankruptcy. Fraud counts in complaints are becoming the new "boilder-plate," although they may have no merit whatsoever in terms of the creditor's ability to prove any fraud whatsoever (a high standard of proof). If you are being sued for collections and are considering filing for bankruptcy to deal with it, it will be important for you to consult with bankruptcy lawyer as quickly as possible, prior to issuance of any default judgment, to explore your options and determine the best timeframe for filing the bankrutpcy petition. The filing of a bankrutpcy petition will stop any such lawsuit dead in its tracks, before judgment is granted. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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