by Scott Schuster

Typically, the central purpose of filing a bankruptcy is to “discharge” all or most of the debtors’ debts. A bankruptcy “discharge” releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order forever prohibiting the debtor’s creditors from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases.

However, the Bankruptcy Code sets forth an extensive list of debts that are nondischargeable. Unfortunately, nondischargeability is not automatic – a creditor that holds such a debt must file a complaint with the Bankruptcy Court seeking to have the debt declared nondischargeable. A nondischargeability complaint must usually be filed within about sixty (60) to ninety (90) days after the debtor files his or her bankruptcy petition. 

The largest category of nondischargable debts are those incurred through: 1) false pretenses, a false representation, or actual fraud; or 2) obtained through the use of a statement in writing, which is materially false regarding the debtor’s financial condition, and on which the creditor reasonably relied.

As one would imagine, the terms “false pretenses, false representations, or actual fraud” can encompass many types of dishonest behavior. An important consideration the court will make is whether the debtor intentionally and knowingly made the false/fraudulent representations. To except a debt from discharge under this section, the false representations giving rise to the debt must have been knowingly and fraudulently made. In other words, the failure to pay a debt is not sufficient, even if there is no excuse for the failure. The debtor has to incur the debt knowing that he will not be able to pay the debt, and knowing that the statements he is making to the creditor about his ability and intention to pay are untrue.

A creditor alleging fraud has the burden of proving that the debtor knew that any stated intention to repay was false and that the debtor nevertheless deliberately incurred the debt. The fact that the debtor was insolvent does not by itself provide a sufficient basis for inferring the debtor’s intent. A debtor’s honest belief that a debt would be repaid in the future, even if in hindsight found to have been very unrealistic, negates any fraudulent intent.

Use of a materially false writing concerning the debtor’s financial position comes up often in transactions that required the debtor to complete a credit application. On most credit applications, lenders will ask a debtor to list their monthly income and their current outstanding debts. Lenders then use this information to determine the debtor’s “debt-to-income” ratio. If the debtor falsely inflates their income, or omits certain debts, then the debt-to-income is inaccurate. If the court determines that the creditor reasonably relied upon the credit application in making the loan, then the debt is nondischargeable.

by Shawn McClure

When a collection claim results in litigation, a creditor must become familiar with certain legal concepts that will often determine whether or not the creditor sees any recovery as a result of the lawsuit.  One such legal concept is the “burden of proof.” 

In all civil litigation, the burden of proof requires the plaintiff, the creditor, to convince the trier of fact (either a judge or jury) of the plaintiff’s entitlement to the relief being sought.  The plaintiff must prove each element of its claim, or cause of action, in order to recover.  In other words, the initial burden of proof is on the plaintiff to show the court why the defendant/debtor owes the money. 

The underlying legal cause of action in a collection case is typically for breach of contract.  Generally, a plaintiff must show: 1) the existence of a contract and its essential terms; 2) a breach of a duty imposed by the contract; and 3) resultant damages.  This is why it is critical that a creditor keep meticulous and detailed business records, which can be used to meet the plaintiff’s initial burden of proof.  

Invoices between the parties can be offered as evidence of the existence of a contract between the parties.  The breach is the defendant/debtor’s failure to pay according to invoice terms.  Lastly, the plaintiff/creditor has been damaged because they have provided goods to the defendant/debtor and have not received payment.  Seems simply enough, but one would be surprised at the number of creditors who do not have or simply do not feel they should be burdened with having to produce such supporting documentation for the court. 

Keep in mind that when your attorney asks you to provide documentation of the claim against the debtor, he or she is not questioning the merits of your claim, but rather preparing to meet the burden that the law has placed on you as a plaintiff in a civil action.  Also, if you havent realized it by now, simply stating that the debtor knows they owe the money will not suffice.