Wrongful conduct on the part of the debtor
When the U.S. Bankruptcy Code was enacted, its primary goal was
debtor rehabilitation, to provide a fresh start to "honest
but unfortunate debtors." The gives debtors the opportunity
to wipe out debts, but there are exceptions. These exceptions are
based on public policy issues, or wrongful conduct on the part
of the debtor.
Debts are divided into two categories -- dischargeable and non-dischargeable.
If the debt is dischargeable, the debt can be wiped out by going through bankruptcy.
Certain debts cannot be discharged through a bankruptcy proceeding. Currently,
the bankruptcy code defines eighteen specific categories of debt that are non-dischargeable.
These include certain taxes, alimony and child support, student loans and some
property settlements, as well as certain other obligations.
Of special interest to credit professionals is the provision of the Code relating
to non-dischargeability based on deceit or fraud. A scheduled debt may be found
by the Court to be non-dischargeable to the extent that:
It is obtained by use of materially false written financial
statements respecting the debtor or an insider on which the
creditor reasonably relied, and that the debtor presented with
the intent to
deceive the creditor into extending credit.
The debt was obtained under false pretenses, by a false representation,
or through actual fraud.
From the trade creditor's point of view, debts incurred when the
debtor had no reasonable expectation or ability to repay would
be non-dischargeable if the creditor can prove to the Court that the
credit was extended based on fraud, or based materially false representations.
For example, if a debtor provided financial statements in support
of a request to increase its credit limit, but those statements
were fraudulent or deliberately and materially misleading the creditor
could petition the Court to have the debt declared non-dischargeable.
The decision about whether to ask the Court to declare a debt to be non-dischargeable
is complex. A trade creditor will require the assistance of an attorney decide
whether or not enough evidence exists to petition the Court to block the discharge
of a pre-petition debt. The creditor must prove to the Court that the debtor
knowingly and intentionally made fraudulent, or materially false representations
as to its financial condition and ability to pay the debt in order to obtain
the goods, or services or money it wanted.