In a typical bankruptcy, the debtor’s goal is to discharge as much of his, her or its debt as possible. The U.S. Bankruptcy Code allows for discharge of certain debts under appropriate circumstances and while creditors have the opportunity to try to protect their interests during the process, the bankruptcy laws are ultimately designed to protect financially-troubled individuals and businesses.
The idea is that, at least on some level, creditors have the opportunity to understand the risks of extending credit, and as a result they justly bear the consequences when someone is unable to pay.
But, what if you did your due diligence and made what you thought was an informed decision only to find out later that the debtor lied or defrauded you? Should the debtor still be able to avoid paying you then?
When Can a Creditor Seek to Prevent Discharge in Bankruptcy?
In some instances, a debtor’s improper or illegal conduct can prevent a discharge in bankruptcy. The following are all examples of situations where creditors may be able to petition the court to protect their claims against a debtor:
If the debtor deliberately made false representations in order to obtain credit or get you to extend a loan and you relied upon the debtor’s misrepresentations in good faith, you may have grounds to seek to avoid discharge on the grounds of fraud.
Theft or Embezzlement
Debts incurred as a result of theft or embezzlement generally are not dischargeable in bankruptcy. If you can prove that your claim arises out of fraud or embezzlement (for example, if you went to court and obtained a judgment), you can petition the bankruptcy court to allow your judgment to survive the bankruptcy. Note, however, that the bankruptcy courts do not necessarily follow state-law definitions of theft and embezzlement – so even if you obtained a judgment, additional evidence may be required.
Willful and Malicious Injury
Discharge can also be avoided in cases that do not involve the specific elements of theft or embezzlement, but which otherwise involve the debtor’s infliction of “willful and malicious injury.” The conduct complained of must satisfy both requirements – willfulness (deliberately causing the injury) and malice (wrongful intent without just cause or excuse) – in order to justify a motion to avoid discharge.
Breach of Fiduciary Duty
The U.S. Bankruptcy Code allows creditors to avoid discharge in bankruptcy for debts incurred through “fraud or defalcation while acting in a fiduciary capacity.” Both fraud and defalcation require more than mere negligence or inadvertence, with defalcation requiring intentional misconduct or extreme recklessness.
Other Forms of Bad Behavior
There are other grounds for creditors to seek to avoid discharge as well. Some of these include:
- Failure to produce financial records
- False pretenses
- False representations
- False oath or account
- False claims
- Refusal to obey a court order
In addition, in some cases creditors can seek to avoid discharge based upon the debtor’s dishonesty with the bankruptcy court. We will cover these issues separately in another post in the near future.
Contact Michael L. Feinstein, P.A. | A Fort Lauderdale Creditors’ Rights Law Firm
The attorneys at Michael L. Feinstein, P.A. provide experienced legal representation for creditors in bankruptcy proceedings in South Florida. If you would like to learn more about your options for seeking to avoid a discharge in bankruptcy, call our Fort Lauderdale law offices at (954) 767-9662 or send us a message online today.