Bankruptcy law is designed to help honest people get out of debt. It is not designed to help people to get away with bad behavior. The law prevents people who lie or commit fraud when obtaining credit to erase those debts through bankruptcy.
The U.S. Bankruptcy Code precludes discharge of debts “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by” false pretenses, a false representation, or actual fraud. 11 U.S.C. § 523 (a)(2)(A).
To prevent discharge of the debt, a creditor must bring an adversarial proceeding within the underlying bankruptcy case, proving the following elements of their claim under §523 of the Bankruptcy Code:
- the debtor made a false representation with intent to deceive the creditor;
- the creditor actually relied on the misrepresentation;
- the creditor’s reliance was justifiable; and
- the misrepresentation causes a loss to the creditor.
HSSM #7 Ltd. P’ship v. Bilzerian (In Re Bilzerian), 100 F.3d 886 (11th Cir. 1996). If a debtor lied or committed fraud when incurring debt, and the creditor actually and justifiably relied on the lies, those debts cannot be erased through bankruptcy.
The United States Bankruptcy Court, Southern District of Georgia, Savannah Division recently handed down an option in a case regarding the exception to discharge for money obtained (debt incurred) by false pretenses.
In Hornsby v. Boone the debtor (and defendant in the adversarial proceeding) Mark Hornsby borrowed $110,000 from Michael Boone, the plaintiff. Hornsby executed a promissory note to Boone. When the note became due, Hornsby gave Boone a check for $110,000. When Boone deposited the check, the bank would not honor it because the account the check had been drawn on was closed. Boone sued Hornsby for nonpayment and won a default judgment in superior court.
The court found that Hornsby “knew or should have known the check was bad.” The court agreed with Boone’s assertion that Hornsby “gave Boone the bad check to induce Boone not to pursue collection under the promissory note.”
However, the court dismissed Boone’s claim, ruled in favor of Hornsby and granted a discharge of the debt. Hornsby v. Boone (In re Hornsby), Case No. 15-41528, Adv. No. 15-04057 (Bankr. S.D. Ga. Sept. 19, 2016).
Even though the court determined that Hornsby knew the check was bad (or should have known) and that he gave the check to Boone to stop him from pursuing collection of the debt, the debt was still dischargeable in bankruptcy. Hornsby does not have to pay Boone back the $110,000 he borrowed under the promissory note.
How is this outcome possible?
The court determined that the loan was not “obtained by” false pretenses because Hornsby did not give Boone the bad check until payment became due. The check was intended to induce Boone to refrain from pursuing collection on the promissory note; however, the check was not part of Hornsby’s receipt of “money, property, services, or an extension, renewal, or refinancing of credit” as would have been necessary under the credit obtained by false pretenses exception to discharge of 11 U.S.C. § 523 (a)(2)(A).
Under the facts of this case, the court did not have to make a determination on whether or not the presentation of a bad check itself is a false representation (an issue on which courts are divided).
The U.S. Bankruptcy Code precludes the discharge of debts incurred by unsavory or illegal acts. However, congruent with good public policy, bankruptcy law provides a powerful tool to help good people get control of their finances and have a fresh financial start.
At the Law Offices of Barbara B. Braziel we file hundreds of Chapter 7 and 13 bankruptcy cases every year. But our clients are never just a number. You will not be left in the hands of a paralegal. You will have access to your attorney throughout your bankruptcy case.
We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.