Bankruptcy law is one area of law that is consistently on the docket of the U.S. Supreme Court. The primary reason there are so many bankruptcy cases decided by the Supreme Court is that it is a federal law, and the many federal circuits often interpret the law differently. When this happens, the Supreme Court steps in and clarifies what the Bankruptcy Code should mean as applied to debtors seeking relief.

This year’s term also saw an important bankruptcy case. The case is important because it involved issues of the dischargeability of debts in certain circumstances. Ultimately the Supreme Court sided with the debtor and allowed his debts to be discharged. As a result, this ruling will have a positive impact overall on future debtors filing for bankruptcy.  

Underlying Facts Before the Supreme Court

This case involved a debtor who owed a large bill for legal services to a prominent Atlanta law firm in Georgia. The case, Lamar, Archer & Cofrin, LLP v. Appling, involved the law firm’s efforts to collect on a debt for legal services they provided. The problem with the debt collection was that, according to the law firm, the man in the case promised that he would be receiving a large tax return the following year. When the debt continued to be unpaid, the firm finally took the man to court and got a judgment against him for the full amount.

Not long after the loss in court, the man in the case declared bankruptcy under the Federal Bankruptcy Code. As part of his filing the man sought to have his debts to the law firm dismissed. The the law firm challenged the dismissal of their debt based on an important section of the Bankruptcy Code.

That section, 523(a)(2), puts limits on the discharge of certain debts. In particular, if a debt is incurred by false pretenses, a false representation, or actual fraud, then the court will not allow the debt to be discharged. But, if any of these qualified statements are about a person’s financial condition, then the exception does not apply.

Issue Before the Court and Ruling

The narrow issue before the court was whether a statement about a tax return constituted a statement about the debtor’s financial condition, and is therefore excused under the law. The Court sided on behalf of the debtors, holding that a statement about a person’s potential or even false future tax return was not the same as incurring a debt through false pretenses, fraud, or a lie.

This is important for future bankruptcy cases because it widens the protections afforded to those who seek relief under bankruptcy laws. At the same time this ruling limits the arguments a debt holder can making in a bankruptcy proceeding. It also will help to expedite proceedings in some cases.

Your California Bankruptcy Legal Team

If you are considering filing for bankruptcy in California, consider our legal team at the Bankruptcy Law Center. We have years of experience helping debtors find relief through the federal bankruptcy laws. Contact us today.

(image courtesy of Andrew Ruiz)