Bankruptcy Code Section 523 sets out a variety of limitations on a bankruptcy discharge if there is fraudulent or criminal behavior involved. For example:
- you cannot discharge a “credit card binge” debt
- you cannot discharge debts if you lied on the loan application
- you cannot discharge debts arising from a DUI or other criminal behavior
- you cannot discharge debts arising from fraudulent conduct
- you cannot discharge a criminal fine
One area where some of these “fraud” or illegal activity provisions trip people up has to do with lawsuits. If you are sued and the creditor alleges fraudulent or illegal conduct in the complaint, and a default judgment issues because you do not answer, you may lose your right to contest the issue if you later file bankruptcy. In other words, bankruptcy judges will accept the findings of another court, including default judgments.
- It is never a good idea to ignore a lawsuit and allow a default to be entered. If you are sued, call our office or call a lawyer for advice.
Our clients sometimes face challenges in bankruptcy court based on allegedly false statements on a credit application. Generally, the courts will require that misrepresentations must be material (i.e., the creditor relied upon the false statement when making a decision to issue credit) but that issue is a matter of fact to be determined by the court.
Lenders will also cry “fraud” if you incur debts like credit card debts when you “know or should know” that you do not have the financial ability to pay back the debt. This is why we sometimes counsel our clients to wait several months prior to filing and to make good faith payments during the waiting period.
Usually, creditors are more interested in money than in having your case thrown out. Usually (but not always) creditors who believe that they have grounds to squeeze you for money based on allegedly improper conduct will contact us by letter or phone prior to filing a dischargeability complaint and negotiate for a possible settlement.