If you are challenged with debt fraud during a bankruptcy case, you will likely not be able to discharge that debt. This means that you will have to pay it back. However, it is important to understand what kinds of debts can be challenged successfully, and what the procedure is for a creditor to challenge it.
People are sometimes concerned about fraudulent debt unnecessarily. And even when there is a legitimate concern, there are sensible reasons why creditors may raise the issue.
Whare Are Fraudulent Debts that Creditors Challenge?
A debt can be challenged if, at the time it was incurred, the debtor received the credit— “money, property, services, or an extension, renewal, or refinancing of credit”—through some kind of intentional misrepresentation, which the creditor relied upon to extend the credit. (See Section 523(a)(2) of the U.S. Bankruptcy Code.)
The misrepresentation can be something in writing about the debtor’s financial conditions—such as a credit application, or it can be about anything that will persuade a creditor to extend the credit. These challenges can come up in countless forms, but the most common ones involve debtors using credit cards for major purchases or cash advances within a relatively short time before filing bankruptcy.
Debts are NOT considered fraudulent for bankruptcy purposes if a debtor simply could not meet payment obligations after the debt was incurred—as some collection agents may try to get debtors to believe.
The Deadline for Creditors to Challenge a Discharge of Debt
A creditor must challenge the alleged fraud or misrepresentation within a very short time after the filing of the case, usually within 60 days of the 341 hearing. That challenge must usually be done through an “adversary proceeding,” a lawsuit filed against the debtor in the bankruptcy case specifically to determine whether the debtor’s actions fit within the definitions stated in the law. As long as the creditor was given appropriate notice of the bankruptcy case, if it does not file a complaint by the stated deadline it permanently loses its ability to do so.
The creditor has a relatively high burden in presenting evidence that will result in the bankruptcy judge declaring a debt not discharged. The creditor also has to weigh whether its attorney fees and other costs—which it can often add to the balance—will likely be paid even if it does prevail. Plus it has the risk that it will have to pay the debtor’s attorney fees to defend the lawsuit if it loses and “the court finds that the position of the creditor was not substantially justified.” (Section 523(d))
Concerned About Debts Potentially Incurred by Fraud?
At Leinart Law Firm, we understand that filing for bankruptcy can be an overwhelming and confusing process. Misrepresenting or fraudulently representing any aspect of your case could give debt collectors the opportunity to mount a discharge challenge, jeopardizing your chance to get the debt relief you need.
Therefore, it’s important to have a bankruptcy or debt lawyer on your side who can guide your case from start to finish.
If you’re just starting a bankruptcy filing and are worried about potentially fraudulent debt, speak to our lawyers for a free case evaluation. Fill in the evaluation form on this page or contact our debt and bankruptcy lawyers in Dallas or Fort Worth to get started.
Call our Dallas office: (469) 232-3328
Call our Fort Worth office: (817) 426-3328