Fraud & False Representation Debts in Bankruptcy
Debts incurred through actual fraud are nondischargeable in bankruptcy. Title 11 of the United States Code §523(a)(2)(A) reads “a discharge under [chapter 7 or chapter 13] does not discharge an individual from any debt…for money, property [or] services… to the extent obtained by false pretenses,a false representation, or actual fraud…”. Accordingly, a creditor may bring a discharge complaint against a debtor on the basis of fraudulently incurred debt under §523(a)(2)(A) and if successful except the debt from discharge. However, to be successful the creditor must show that the debtor made a representation that at the time of its making the debtor knew to be false and that the debtor made the representation with the intention and purpose of deceiving the creditor to which the creditor justifiably relied upon the debtor’s representation and because of which the creditor sustained losses caused by the debtor’s representation.
Knowledge of Falsity
To except a debt from discharge in bankruptcy under §523(a)(2)(A) the creditor must show that the debtor had actual knowledge of the falsity of their statement or held reckless disregard for its truth. To satisfy this element it is not enough that the debtor merely failed to perform some promised future action. (Many debtors do not fulfill the promised action that induced the extension of credit). Rather, the creditor must show that the debtor intended to deceive or make a false representation. Consequently, if a debtor induced the extension of credit by promising to perform some future action that the debtor had no intention of performing at the time of the promise, the debtor would have actual knowledge of the falsity of their representation thereby satisfying the element.
The creditor must also justifiably rely on the debtor’s false representation. Within the meaning of §523(a)(2)(A) justifiable reliance is less than reasonable reliance. A creditor can be said to have justifiably relied on a debtor’s false representation even though the creditor could have discovered the falsity with due diligence or investigation. In contrast, a creditor cannot be said to have justifiably relied on a debtor’s false representation if the falsity was obvious or the creditor had actual knowledge of its falsity. Therefore, creditor’s can justifiably rely on debtor representations without investigating their accuracy as long as they do not stretch the bounds of plausibility and the creditor has no actual knowledge of their falsity.
Amount Excepted from Discharge
The amount excepted from discharge in bankruptcy due to fraudulently incurred debt under §523(a)(2)(A) is not limited to the amount by which the debtor was enriched, but rather extends to the amount of loss experienced by the creditor due to the debtor’s false representation. Therefore, the amount excepted from discharge under §523(a)(2)(A) can be greater than the dollar value by which the debtor was enriched by the fraud and can encompass punitive damages, attorney fees, and costs awarded to the creditor due to the debtor’s fraud. In essence, all debts that arise from the debtor’s fraud may be nondischargeable under §523(a)(2)(A).