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A Chapter 7 Bankruptcy Won't Discharge Debts Obtained by Fraud

June 25, 2012

A Chapter 7 bankruptcy is intended to provide people who are in over their heads with debt a chance to start over again. hidingface.jpg

However, there are a number of exceptions to the kinds of debts that can be discharged. As Orange County Chapter 7 Bankruptcy Attorney Vincent Howard can explain in more depth during a consultation, but generally these would be things like student loans, taxes, child support payments, etc.

Bankruptcy is not intended to provide protection from fraud.

That was the issue in Bandi v. Becnel, heard by appellate justices in the U.S. Court of Appeals for the Fifth Circuit in Louisiana. While this matter happened outside California, the same bankruptcy laws are applicable no matter where you are in the country, so the issue is still relevant here.

Essentially, the facts of the case are this:

Two brothers, last name Bandi, were paid $150,000 by a man with the last name Becnel. This was reportedly a loan, which the brothers were expected to repay. A few months later, both brothers separately filed for Chapter 7 bankruptcy protection. In most cases, a bankruptcy filing will protect you from having to repay loans such as this. However, creditors can file whats known as an adversary proceeding. This essentially allows them to offer an argument as to why the debts owed to them should not be discharged.

Following this, Becnel filed an adversary proceeding against both brothers, saying that his debt should not be discharged, as it was obtained by fraud. Becnel said he only later learned that the brothers had misrepresented themselves. They reportedly told him that they owned several commercial properties, which they did not, and additionally, had shown Becnel a list of accounts receivable that was actually fraudulent. Had he known all this, Becnel said, he would never have given the brothers the loan. Further, he argued that it appeared as if the brothers had never intended to repay that loan, as they filed for bankruptcy soon after they received it.

The bankruptcy court decided to consolidate Becnel's two adversary claims into one issue. After hearing his side, the brothers cross-examined witnesses, but provided no evidence to refute Becnel's testimony and evidence.

The bankruptcy court ruled in favor of Becnel, saying the debt should not be discharged

The brothers then appealed that decision to the district court, which affirmed the bankruptcy court's decision. That brother's then appealed to the Fifth District court, which also affirmed.

The brothers argued that the appeals court should reconsider, given how previous justices were split regarding their interpretation of 11 U.S.C. 523(a)(2)(A), which spells out exceptions to a bankruptcy discharge. In particular, this section deals with money, property or services that is obtained under false pretenses, by false representation or actual fraud.

The brothers maintained that any alleged fraudulent statements they made were with respect to their financial condition, and therefore, the debts should be covered under the law.

Not so, the court ruled. In fact, the court ruled that the clause the brothers referred to was intended to protect people potentially facing bankruptcy from commercial exploitation or discrimination. It was not, the court determined, meant to serve as protection for someone who has committed fraud.

The best way to avoid a scenario like this is to be upfront with your bankruptcy attorney and have a detailed and honest discussion about which debts are able to be discharged and which are not.

Orange County Bankruptcy Attorney Vincent Howard at Howard Law can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.

Additional Resources:
Bandi v. Becnel, U.S. Appeals Court Fifth Circuit, Justia Dockets

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