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Archive for the ‘misrepresentation’ tag

The Closing Arguments in a Dischargeability Proceeding: an Example

April 5th, 2017 at 7:00 am

In our example about the adversary proceeding about whether a debt gets discharged, here are the creditor’s and debtor’s closing arguments. 

 

Here’s the fifth blog post in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last four posts about the different steps in the “adversary proceeding” so far, including the trial itself. Now it’s time for the two sides to give their closing arguments to the bankruptcy judge.

The Creditor’s Closing Argument

The lawyer for the creditor says the following to the bankruptcy judge:

As the U.S. Supreme Court said way back in 1934, bankruptcy law “gives to the honest but unfortunate debtor… a new opportunity in life… unhampered by the pressure and discouragement of preexisting debt.”

As the debtor here fully admits, he was NOT honest with his creditor, Heather, his aunt. Marshall admitted that he purposely did not include his debt to another aunt on his loan application to Heather. He admitted that he did this because he was afraid that otherwise Heather would not give him the loan. He desperately wanted that loan. It was the only way he could start his business. So he stooped to lying, and put his lie in writing. He then signed the loan application, dishonestly asserting that what he wrote was truthful.

Marshall’s omission was not insignificant or immaterial.

The outstanding loan balance was $7,500. This amount was enough that, had Heather known about it, that outstanding loan likely would have given Heather pause about providing her own loan.

The existence of the prior loan was a material fact and his omission of it was a material omission. That prior loan was another family loan. Had Heather known about it, she could well have figured that if money got tight for Marshall down the line and he had to choose, he’d pay the earlier loan ahead of hers. So Heather definitely deserved to know about that loan balance before she made her decision about giving Marshall a new loan.

The Creditor Lawyer’s Conclusion

Marshall says now that he believed at the time that Heather would not base her decision on the loan application. He tells us his impression at the time was that this documents wasn’t all that important. And yet Heather told him directly that she had her lawyer prepare the application and other loan documents because she wanted the loan to be legally enforceable. He had every reason to know that the loan application was a meaningful document. He knew he needed to take it seriously, that he had every obligation to complete it truthfully. He can’t now use the excuse that he didn’t have to be honest because Heather wouldn’t treat the application seriously in making her decision.

Marshall materially lied on the one and only document that he presented to Heather to have her decide whether or not to give him a loan. He cannot now claim to be an “honest but unfortunate debtor” deserving to write off his debt to Heather. This court must therefore exclude this one debt from the discharge Marshall is getting of his other debts.

The Debtor’s Closing Argument

Then the lawyer for Marshall, the debtor, says the following to the judge:

The creditor here, Heather, has failed to establish three different elements of her case. If she fails to establish even JUST ONE of these elements, the debt must be discharged.

First, while Marshall’s omission was admittedly false, it was not materially false. What’s crucial to the omission being material is not the amount of the prior loan. Nor is it that this prior loan was a family loan like Heather’s. What is crucial under the law is whether Heather would have made the loan to Marshall if he would have included the other aunt’s prior loan in Heather’s loan application. An omission is material if it would have made a difference in the creditor’s decision to make the loan.

The evidence is quite clear that not including the prior loan was not a material omission. Heather admitted she didn’t even look at the completed loan application, nor discuss its contents with her lawyer.  Heather testified here that she based her lending decision on family considerations, not on Marshall’s finances. Whether one particular debt was or was not included in the loan application had no bearing on Heather’s decision. The omission was immaterial.

Second, Marshall did not omit the prior debt “with intent to deceive” Heather. He completed the application with the understanding that what he wrote on it was not important to Heather. He was reasonable in this understanding because that was what he had heard, albeit indirectly, from Heather. She signaled strongly to him that her decision was being made primarily or even exclusively because of their relationship. This included both their family and personal relationship.

Marshall admitted that he intentionally did not include the prior debt, but for a very specific reason. He knew that at the time Heather was having a quarrel with his other aunt who’d made that prior loan. Marshall knew Heather could be impulsive, erratic, and even irrational. So Marshall was justifiably concerned that Heather would somehow let some irrelevant irritation cause her to deny him the loan. He imagined her telling him to instead just go back to that other aunt for more money. He already knew the other aunt was unable to lend him what he needed. His only intent in not listing the prior loan on the application was to avoid having Heather hit an emotional tripwire that would distract her from her decision to make the loan.

The Debtor Lawyer’s Conclusion

Third and most clearly, Heather did not rely on, much less reasonably rely on, on the loan application in her decision. She particularly didn’t rely on Marshall’s omission of the other loan. She never read the application, didn’t discuss the contents with her lawyer, and nothing about the application entered into her loan-making decision.

This creditor bases her entire argument on Section 523(a)(2)(B) of the Bankruptcy Code. That requires the use of a materially false “statement in writing” on which the creditor “reasonably relied.” It’s perfectly clear from the evidence presented at this trial that the creditor here does not meet this element of reasonable reliance. So just as perfectly clearly the debt at issue here should be discharged in this bankruptcy case.

The Judge’s Decision

Our next blog post in a couple days will give, and then explain, the judge’s decision about whether or not this debt will be discharged in bankruptcy.

 

Options for Dealing with a Nondischargeability Complaint

March 17th, 2017 at 7:00 am

If a creditor objects to you writing off —discharging—a debt in a Chapter 7 bankruptcy on grounds of fraud, here are your practical options. 

Adversary Proceedings and the Discharge of Debts

Two weeks ago we introduced adversary proceedings—lawsuits in bankruptcy court. We focused on adversary proceedings in which a creditor objects to the discharge—write-off—of one of your debts.

This does not happen in most cases. That’s because the law makes some debts clearly dischargeable and other debts clearly not dischargeable. Recent income taxes, all criminal fines and restitution, and all child and spousal support are simply not dischargeable. On the other hand, most debts ARE simply dischargeable. There’s usually no dispute so it doesn’t take litigation to determine whether the debt will be discharged or not.

The big area where disputes can arise is when a debt was allegedly incurred through a debtor’s fraud, misrepresentation, or other similar bad behavior. Even these happen less than you might think. But they CAN happen, and sometimes when you don’t expect it. So let’s look practically at what happens in these situations.

Potentially Nondischargeable Debts

There are two main circumstances in which creditors can object to the discharge of a debt that would otherwise qualify for discharge.

First, you’re accused of incurred the debt through misrepresentation or fraud. Basically, you got the debt by lying about something important related to the debt. The classic example is providing false or incomplete information on a loan application. But this can also include debts from bounced checks or from using a credit card without intending to pay it. (See Section 523(a)(2) of the U.S. Bankruptcy Code.)

Second, you’re accused of intentionally and maliciously hurting someone or their property, causing bodily or financial harm. For example, you had an altercation with an ex-spouse resulting in some bodily harm. Someone accuses you of slashing their tires. (Section 523(a)(6).)

It’s these somewhat unusual kinds of behavior that open you up to dischargeability challenges.

If Creditor Doesn’t Complain on Time

If you are concerned about any of this, make it the first thing you talk about with your bankruptcy lawyer. You may have little or nothing to worry about. If you do have some valid concerns, it’s crucial for your lawyer to know about it. Certain steps may be taken to reduce your risks. You and your lawyer need to get prepared for dealing with the anticipated objection.

The objection will not necessarily come. Creditors have a very limited time to raise these objections. The deadline is 60 days after your “meeting of creditors,” so about 3 months after filing your bankruptcy case. As long as you give appropriate notice of your bankruptcy case, if the creditor does not formally file an objection in the form of an adversary proceeding in your case by the deadline date, the debt is discharged. That’s true even if the creditor really did have grounds upon which discharge could have been denied. A creditor may simply blow it. Or it may decide to not throw good money after bad, spending lawyer fees on a case that it may lose.

Your Options If a Creditor Does Complain

If a creditor does file a nondischargeability complaint on time, you have three basic options. You can:

  • defend yourself vigorously so that you end up not having to pay the debt after all
  • accept that you would lose the dispute and settle right away
  • push back for a time until the facts induce you to settle by paying part of the debt

Fighting to the Death

Just because a creditor believes that your actions disqualify you from discharging the debt does not mean it is correct.  The creditor may be irrationally angry at you and wants you to pay the debt no matter what. He, she, or it may not have an especially strong case but just wants you to pay. There may be enough money at stake that it is worth fighting back with everything you have. When dealing with an irrational foe, with facts in your favor, and with a lot at stake, you might have to fight back until you win.

Settle Right Away

Sometimes the opposite is true. The creditor has a strong case against you. You wrote a string of bad checks when you should have known there wasn’t enough money in your account. Your lawyer looks at the facts and advises you that you would lose the adversary proceeding. It’s time to settle the case. Avoid the cost and aggravation of fighting a losing fight and still having to pay the debt.  

Fight Back but Expect to Settle

Most dischargeability challenges are somewhere in between. The creditor seems to have some valid grounds. You have some sensible reasons why the debt should still be discharged.

But frankly it’s expensive to fight back. Once a creditor has decided to spend the money on its lawyer to file the nondischargeability case against you, it usually expects to get some money out of you. It can almost for sure more easily afford the lawyer fees than you can.

So usually what happens is that right after the creditor files its complaint, there’s some informal fact-gathering. To the extent you haven’t already done so, you tell your lawyer your side of the story. He or she exchanges information about the allegations with the creditor’s lawyer. Your lawyer advises you about any strengths and weaknesses of your case, and discusses settlement options. The lawyers hammer out a reasonable settlement, usually for you to pay a portion of the debt over time. Given that you’ve discharged all or most of your other debts, it’s something that you can afford. It’s a sensible resolution of the dispute.

 

New Thresholds for a “Luxury” Purchase or Cash Advance to Be Presumed Fraudulent

February 29th, 2016 at 8:00 am

Creditors will be a little less likely to challenge the writing off of recent uses of credit.


As of April 1, 2016 creditors will have slightly harder time showing that recent credit purchases or cash advances were fraudulent and so can’t be written off (“discharged”) in bankruptcy. That’s because to qualify for a “presumption of fraud,” creditors will need to have a higher dollar amount threshold before that presumption kicks in. The “presumption of fraud” makes it easier for a creditor to object to the discharge of a debt. With the new higher threshold, the “presumption” will not kick in quite as often, to the benefit of consumers filing bankruptcy.

If you’ve made credit purchases or cash advances in the last few months and are considering bankruptcy, this may benefit you.

Discharge of Debts in Bankruptcy

When you file bankruptcy most kinds of debts are discharged so that you never have to pay them. But certain select debts are never discharged—such as past-due child support. And some kinds of debts are discharged unless the creditor objects to the discharge and persuades the bankruptcy court that certain conditions are met so that discharge is not legally appropriate.

Debts of this last kind—that may be objected to—include those allegedly incurred through fraud or misrepresentation. Among those are recent ‘luxury’ purchases and cash advances. Under certain circumstances the Bankruptcy Code says those “are presumed to be nondischargeable.” How does this “presumption” work, and how could the upcoming adjustments in the law help you?

The Fraud Exception to the Discharge of Your Debts

One of the principles of bankruptcy is that you can’t purposely cheat a creditor in the incurring of a debt and then later discharge that debt through bankruptcy. Specifically, a creditor can challenge your ability to write off a particular debt if it was “obtained by… “false pretenses, false representation, or actual fraud… .” See Section 523(a)(2) of the Bankruptcy Code.

What’s a “Presumption”?

As mentioned above, a creditor has to object to the discharge of a debt that it thinks you incurred fraudulently, or else that debt will be still be discharged. In its objection the creditor normally has to provide evidence to the court proving your alleged fraud or misrepresentation. A presumption of fraud allows the creditor’s objection to go forward even without direct evidence of fraud. All it needs to show that certain circumstances arise that give rise to a “presumption” that you’ve committed fraud in how you incurred the debt.

The two sets of circumstances in which a presumption of fraud arises are with purchases of “luxury goods or services” and with cash advances, both occurring within a certain amount of time before the filing of your bankruptcy case.

The “Luxury Goods or Services” Presumption

Before April 1, 2016 if a consumer buys more than $650 in “luxury goods or services” in the 90 days before filing the bankruptcy, that debt is presumed not to be dischargeable. That means that the creditor may not need to provide direct evidence that the debtor did not intend to pay the debt at the time the purchase.

The rationale behind this presumption is that there is a sensible chance that within that short of a time before filing bankruptcy most debtors would either know that he or she intended to file bankruptcy, or would be considering doing so. If so, then at the time of purchase there is a greater likelihood the debtor did not have the intention to pay the debt arising from that purchase.

This presumption only applies to the purchase of “luxury goods or services.” But the meaning of this phrase is much broader than it sounds. It includes everything except goods or services “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.”

As of April 1 the $650 threshold of “luxury goods and services” purchased within the 90 days before filing is increasing from $650 to $675. That means that you can make slightly more in purchases during this time period before the presumption kicks in. So this advantage for creditors is being narrowed a little. (See Section 523(a)(2)(C)(i)(I).)

The Cash Advances Presumption

Similarly, if a consumer incurs a debt of more than $925 ($950 starting April 1) through one or more cash advances made in the 70 days before filing the bankruptcy, then that debt is presumed not to be dischargeable. Again, that means that the creditor may not need to prove through evidence that the debtor did not intend to pay the debt at the time the cash advance. (See Section 523(a)(2)(C)(i)(II).)

The Presumption Can Be “Rebutted”

We are saying that the creditor MAY not need to prove fraud because that occurs only if you don’t respond by “rebutting that presumption.” Once the creditor “raises the presumption” by alleging the necessary facts to fit within the presumption, you can force the creditor to back up the presumption with evidence. The creditor can win with only the presumption of fraud if you don’t push back. But with the right facts you can defeat the presumption and not have to pay the debt.

 Assume, for example, that you made a cash advance of more than $925/$950 within the 70 day period before filing bankruptcy, and the creditor objects to the bankruptcy court. If you in fact did intend to pay the debt at the time you made the purchase, you would respond to the court about your honest intent. You and your attorney would do this through your own direct testimony about your intent and/or by establishing other relevant facts, such as what happened in your financial life after you made the cash advance which then drove you to file bankruptcy and seek to discharge that debt.

A Creditor Can Bring Evidence of Fraud without a Presumption

On the other hand, a creditor can object to the discharge of a debt on grounds that you didn’t intend to pay it at the time of the purchase or cash advance or some other kind of fraud, and do so without the presumptions. For example, a creditor could object to the discharge of a debt that was incurred through a misrepresentation, such as with a credit application that greatly exaggerates a debtor’s income or assets, a year or two before the bankruptcy filing.

A presumption helps a creditor in the circumstances where they apply. But if a presumption doesn’t apply, the creditor could still potentially challenge your ability to discharge that debt. The creditor would have to give the court strong evidence that you did not intend to pay the debt, which is usually not easy to come up with. That’s why creditors are not as likely to challenge purchases and cash advances that were made outside the presumption periods.

Avoiding These Presumptions of Fraud

You can avoid giving a creditor the advantage of these presumptions. First, you can avoid using any credit and making cash advances in the few months before filing bankruptcy. And, second, if you’ve already incurred made such purchases and/or cash advances you could just hold off on filing bankruptcy until enough time has passed to get beyond these 70 and 90-day presumption periods.

Remember again that if a creditor thinks it has evidence that you incurred a debt that at that time you did not intend to pay, or that there was some other kind of fraud or misrepresentation, the creditor may still decide to raise the issue without the benefit of a presumption. But if you avoid filing within the 70/90-day presumption periods you will decrease the chance that a creditor will challenge the discharge of its debt. 

 

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