Fraud Prevents Bankruptcy Discharge

A debtor guilty of fraud is denied a discharge in bankruptcy.  Section 523(a)(2)(A) excepts from discharge a debt “for money, property, services, or an extension, renewal or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”

The U.S. Supreme Court said in Cohen v. de la Cruz, “The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud…affording relief only to an honest but unfortunate debtor.”

The burden of proof lies with the creditor of proving non-dischargeability by a preponderance of the evidence.  Though, one need not prove a specific incident of misrepresentation.

The Seventh Circuit Court of Appeals, in McClelland v Cantrell, determined that actual fraud is broader than a false representation.  The Court distinguished between the two types of fraud, as both were elements of Section 523, hence, one must have meaning different from the other, or only one phrase would have been used in the statute.  The McClelland court adopted a broad concept of fraud rather than a specific definition.  The Court stated “Fraud is a generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or by the suppression of truth.  No definite and invariable rule can be laid down as a general proposition defining fraud, and it includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated.”

When it comes to fraud, the Court knows it when it sees it.