U.S. Supreme Court Rules in Favor of Debtor in Bankruptcy Case

The Background on the Case

Earlier this year we discussed the consumer bankruptcy case of Lamar, Archer & Cofrin, LLP v. Appling. In the case, the debtor told the creditor that he planned to repay the debt with a tax refund of $100,000. The debtor actually applied for a tax refund of only $60,000, and did not repay the debt. When all was said and done, he owed the creditor $104,000. The debtor filed for Chapter 7 bankruptcy, and sought to have the $104,000 debt discharged. The creditor argued that the debt was not dischargeable because it fell into the category of a “fraud exception” under the U.S. Bankruptcy Code.

Under the U.S. Bankruptcy Code, a debtor cannot discharge a debt that has been “obtained by false pretenses, a false representation, or actual fraud.” However, there is an exception to this fraud exception. The Bankruptcy Code clarifies that, when a debtor makes a statement that looks like fraud, the debt can still be discharged if the statement was “respecting the debtor’s . . . financial condition.”

When the U.S. Supreme Court heard the case, the issue largely concerned an interpretation of the phrase “respecting the debtor’s . . . financial condition” and, more specifically, the definition of the word “respecting.”

Defining the Word “Respecting” in the Bankruptcy Code

According to a report on the case in SCOTUSblog, Appling “turned on the breadth of the word ‘respecting’ since it is not defined in the Bankruptcy Code. The Court had to determine whether the debtor’s single statement about his debt—the statement in which he said he would repay the debt with a tax refund—could qualify has a statement “respecting the debtor’s . . . financial condition.” The debtor argued that the single statement could in fact qualify as a statement “respecting the debtor’s . . . financial condition,” allowing the debt to be dischargeable as an exception to the exception, while the creditor argued that the single statement could not qualify as such.

In brief, the Court clarified that “a statement about a single asset can be a ‘statement respecting the debtor’s financial condition.’” In other words, the debtor was eligible to have the $104,000 debt discharged because it was an exception to the exception.

The Court focused heavily on defining the word “respecting” in order to determine whether a single statement could fall into the exception-to-the-exception category, allowing the debtor’s debt to be discharged. The Court explained that, “in ordinary usage, ‘respecting’ means ‘concerning; about; regarding; in regard to; relating to.’” The creditor wanted the word “respecting” to be defined narrowly so that it could not refer to a single statement made by the debtor, while the debtor wanted the term to be defined broadly so that it could include a single statement. The Court went on to clarify that “use of the word ‘respecting’ in a legal context generally has a broadening effect, ensuring that a provision’s scope covers not only its subject but also matters relating to that subject.”

The key takeaway is this: A single statement made by a debtor can indeed be a “statement about a single asset can be a ‘statement respecting the debtor’s financial condition,” thereby allowing the debtor to discharge the debt as an exception to the fraud exception.

Discuss Your Case with an Oak Park Bankruptcy Lawyer

Bankruptcy discharge issues can be complicated. If you are considering bankruptcy or have questions about whether a particular type of debt is dischargeable, an Oak Park bankruptcy attorney can help. Contact the Emerson Law Firm today to get started on your case.

See Related Blog Posts:

Consumer Debt is Reaching New Highs

Why Personal Bankruptcy Might Not Affect Your Credit Score as Much as You Think