Some debts will be discharged in a chapter 7 bankruptcy case UNLESS the creditor files a complaint and obtains a court order that the debtor will remain responsible for the debt after the case is over.
The debts that are not dischargeable if the creditor successfully challenges discharge are typically:
1. Debts that arise as a result of a fraudulent action. This includes:
a. Debts that are the result of an intentionally fraudulent act in which the creditor relied on the deceit in its extension of credit. Examples:
– Debtor obtained the loan and promised to pay back when had no intention to do so (this is common i.e. borrowing money against a line of credit or credit card when the debtor knows they are insolvent and unable to pay and/or is going to file for bankruptcy)
– Debtor borrowed an item and used it as collateral for a loan – Debtor wrote a check for an item, stopped payment on the check and kept the item – Debtor wrote a check when funds in the account were insufficient then promised the seller the check was good
b. Recent credit card charges that were used to buy luxury items.
– The law presumes…that a debt is fraudulent if it was more than 550.00 from any particular creditor for a luxury good or service within 90 days prior to filing the bankruptcy
c. Debts incurred based on a false written document about financial condition. Requirements:
– The statement must be in writing obviously.
– It must have been “material” i.e. a very important factor in the creditor's decision to extend
credit. (overstatement of income is a common material false statement)
– The false statement must relate to financial condition – There must have been an intent to deceive the creditor – The creditor must have reasonably relied on statement
d. Recent cash advances
– A cash advance on an “open end” account that is more than $825 within 70 days prior to filing for bankruptcy, is not dischargeable.
2. Debts that arise as a result of Debtor’s willful and malicious act:
a. If the debtor both intended to cause a specific injury to a person or property, the
debt isn’t dischargeable if the creditor objects. Common examples are debts arising from, arson, vandalism, assault, and rape. If the debtor is simply “careless” i.e.
texting while driving causing an accident, the debt will likely be dischargeable over the creditor objection.
3. Unlisted Creditors
a. Bankruptcy law requires full disclosure. This includes disclosure of everyone owed. If the creditor isn’t listed, they can’t get notice and therefore aren’t discharged. There are a few exceptions to this:
– If the creditor knew or should have known about the bankruptcy filing.
– If all the debtor’s assets are exempt. As the creditor wouldn’t have benefited from the notice anyway where there is no money to share. However, if the failure to notice the creditor prevented the creditor from objecting to the discharge for fraud or one of the other reasons stated above, the debt may survive.
4. Debtor resulting from embezzlement, larceny, or breach of fiduciary duty.
a. Embezzlement is what happens when property held for the benefit of another is used by the debtor who is holding the property, for his or her own purposes.
b. Larceny is theft.
c. Breach of fiduciary duty – failure to live up to a duty to manage property or money for another where the debtor’s relationship is close like, husband and wife, guardian and ward, executor of an estate and the beneficiary, and attorney/client.