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Bankruptcy has worked as an important tool throughout America’s history. When people get in over their heads financially and do not have any other avenue of relief, bankruptcy has been there to provide a fresh start to those in need. This fresh start has provided countless people with the ability to move forward and continue as contributing members of society.

Bankruptcy as societal tool for good has come with certain, important assumptions that are needed to ensure it is effective. One of those assumptions is that those seeking bankruptcy do not defraud creditors during the process. The U.S. Bankruptcy Code reflects this assumption. Section 523(a)(2)(A) of the code prevents anyone from discharging debt when credit was obtained through false pretenses, false representation, or actual fraud.  

Now the U.S. Supreme Court will decide what actual fraud means and settle a dispute among lower courts about what kinds of debt can be discharged under the code. This case will act as a precedent in future cases that will affect what kinds of debts will and will not be discharged with bankruptcy. The task of the court will be to ensure that their ruling does not prevent the honest but unfortunate debtor from benefiting from the Bankruptcy Code.

What Happened in This Case

According to the lower court opinion, this case involved a business owner who over the span of several years purchased more than $100,000 in electrical equipment on credit on behalf of one of his companies. During and after that time the business owner is alleged to have transferred over a $1 million from that business to several other businesses that he controls. Then, after never paying for the electrical equipment, he declared bankruptcy and sought to have the debts discharged.

The electrical company holding the more than $100,000 debt asked the bankruptcy court to prevent the discharge under the fraud section of the Bankruptcy Code. While the court sympathized with the electrical company, they determined that the man had not committed actual fraud, and therefore the debts were dischargeable. The Fifth Circuit Court of Appeals agreed and the case is now in front of the Supreme Court for a decision.

Future for Bankruptcy Cases

The Highest Court in the land took on this case because of the different ways lower courts have interpreted the actual fraud provision in the Bankruptcy Code. Some courts have taken the position that the provision of actual fraud should be interpreted broadly, and apply any time it is clear that the debtor is involved in a scheme to cheat creditors. But other courts have held that actual fraud should only apply when the debtor actually lies to a creditor (the classic interpretation of fraud).

At The Bankruptcy Law Center we will follow this and other important bankruptcy cases very closely so that our clients get the very best representation available. If you are wondering whether bankruptcy might be the right choice for you, contact us. We look forward to answering your questions and providing you with legal options.