Defending a Fraud Complaint

29 Jan Defending a Fraud Complaint

In bankruptcy, creditors are permitted to object to the dischargeability of a debt incurred by fraud. Such complaints often initiate very contentious proceedings (and are often combined with complaints to deny a debtor’s general discharge). When faced with a fraud complaint in bankruptcy under Section 523(a)(2), here are some points to remember.

  • The creditor must prove that the debtor made statements or representations that were actually fraudulent, constructive or implied fraud will not do. This will always create a triable issue of fact on the debtor’s intent.
  • The creditor must prove that he justifiable relied on the false and fraudulent statements. In the context of reliance on a false financial statement, this is an objective test, but with verbal statements the test is a subjective one.
  • The creditor has the burden of proving all the elements of the complaint. The preponderance of the evidence standard applies.
  • Because the complaint is one for fraud, the allegations must be pled with particularity. Vague allegations are not sufficient: the creditor must give details about the purportedly fraudulent statements.
  • If the creditor loses, the debtor can seek to recover his attorney’s fees under Section 523(c). To avoid an order shifting fees, the loosing creditor bears the burden of showing his position was substantially justified.
  • A debtor can bring counterclaims against the creditor when responding to the complaint. Counterclaims, when available, can often change the dynamic of a case significantly.

Defending a fraud complaint is difficult–and often expensive–but the burden in proving actual fraud is a heavy one and a debtor should not often simply surrender when faced with such a complaint.

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Nicholas Ortiz, Boston Bankruptcy Attorney

From Attorney Ortiz: We have been helping consumers and small businesses in Massachusetts successfully navigate through the bankruptcy process since 2002. We offer free initial consultations and payment plans. Call us at 617-716-0282 to discuss your debt relief options. Mention the Bankruptcy Law Network when you call!
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