Fraud Elements to Avoid Discharge in Bankruptcy

Certain types of fraud are not dischargeable in bankruptcy. United States Bankruptcy law has very specific requirements to establish the type of fraud that is not dischargeable in bankruptcy. That is, only some fraud is not dischargeable.

In general, lawsuit judgments and debts are dischargeable in bankruptcy except for a select few including child support obligations, alimony, some student loans, some taxes, fines and restitution, and some fraud. When a person engages in certain types of fraud, the United States Bankruptcy Code prevents this person from discharging the debt that resulted from fraud.

How to Sue for Fraud to Avoid a Defendant’s Discharge in Bankruptcy

The following is an example of the type of language that needs to be pled in a complaint to alleged fraud to ensure that a debtor cannot discharge the debt in bankruptcy after the lawsuit is complete.

These elements must be alleged verbatim, combined with underlying facts, in the Complaint. In addition, you must ensure the judge includes these in the court’s Findings of Fact:

  1. the debtor made a representation,
  2. with knowledge of its falsity,
  3. deliberately for the purpose of deceiving the creditor,
  4. who justifiably relied on the representation,
  5. which proximately caused the creditor damage.

Fraud must be pled with specificity regarding the facts that support the claim. Courts may also have other fraud pleading requirements.

Why is Some Fraud Not Dischargeable in Bankruptcy?

The purpose behind the law is to prevent someone from taking something by fraud, keeping it, and then discharging the obligation to return it or compensate the owner for its value.

For example, imagine you wrote a fake check to someone to buy their diamond ring. You receive the diamond ring. The seller goes to the bank to cash the check and learns she is the victim of fraud. Should you be able to file bankruptcy and keep the diamond ring by discharging the debt to the seller? No.

Contrast that with the situation where you promise to pay the seller through monthly payments. In this case, the seller has agree to give you credit. There is no fraud. If you file for bankruptcy, a bankruptcy discharge of the debt is a risk the seller willingly took in doing this deal with you.

Fraud is Lying about an Existing Fact, Not Breaking a Promise

Fraud involves a lie about a present or existing fact. This is very different from promising to pay in the future. A typical debt involves liability for negligence, breach of contract, or commitment to pay in the future. However, fraud involves a significant misrepresentation of an existing fact the creditor relied on.

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