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Supreme Court to Decide whether a Debtor Who Lied to Obtain Credit can Discharge that Debt in Bankruptcy

Coins flowing out of jar and bad news headlines relating to debt and bankruptcy

A case currently before the Supreme Court may have a serious effect on Americans deep in debt and on how lenders, particularly small business lenders, give out loans. In Lamar, Archer & Cofrin, LLP v. Appling, the Supreme Court is set to answer whether someone who lied about an asset to obtain credit can discharge that debt in a personal bankruptcy. Read on to learn about the pending case, and contact an experienced bankruptcy attorney if you are considering filing for bankruptcy.

Debtor lies to law firm to put off payment

A Georgia man racked up a debt of over $60,000 to a law firm for legal work relating to his purchase of a manufacturing business. He avoided collection attempts from the firm by claiming that he was set to receive a $100,000 tax return refund in the near future. The law firm allowed him to put off payments based on his statements about his pending tax return refund. In reality, he received a $60,000 tax return refund and did not use any of the proceeds to pay off his debt to the law firm. The firm successfully sued him for payments owed, and he later filed for bankruptcy seeking to discharge his debt to the firm.

Debtor wins in federal appellate court

Section 523(a)(2) of the federal Bankruptcy Code prohibits discharge of debt in a bankruptcy if the debt is based on money or services obtained via fraud or false pretenses, “other than a statement respecting the debtor’s . . . financial condition.” In a contested bankruptcy proceeding, the firm argued that they only extended him credit because of his allegedly fraudulent statements, while the Georgia man argued that his statement about his pending tax return was a statement “respecting [his] . . . financial condition,” and thus falls under the exception to the fraud rule. The bankruptcy and federal district court agreed with the law firm, deciding that a false statement about a single asset “is not a statement of financial condition.”

The Eleventh Circuit disagreed, finding that while “financial condition” means someone’s overall financial status, a statement about an asset still counts as “respecting” that financial condition, and thus the man could discharge the debt to the firm.

Supreme Court takes the case and hears oral argument

Due to disagreement among the federal circuit courts on the issue, the United States Supreme Court took the case and held oral arguments on April 17, 2018. The Court’s decision could have a significant impact on debtors around the country who have misled lenders and later try to discharge debt in bankruptcy, pitting the interests of financially distressed individuals against small businesses afraid of being tricked.

If you are struggling with debt in Southern California and want to know your options, contact the knowledgeable and compassionate Ventura bankruptcy lawyers at Rounds & Sutter for a free consultation at 805-650-7100.