Document Type
Research Memorandum
Publication Date
2016
Abstract
(Excerpt)
Discharge is of singular importance to the individual in a Chapter 7 case. Discharge enables the debtor to begin a new financial life, and it provides the debtor with a fresh start. In order for this to happen, among other effects, section 524 of title 11 of the United States Code (the “Bankruptcy Code”), which addresses the effects of discharge, voids any judgment against the debtor subject to the discharge. Section 524 also provides a statutory injunction against the continued prosecution of any action that would lead to liability on the claim subject to discharge. Section 727 of the Bankruptcy Code provides the circumstances for when the court must grant a discharge to a chapter 7 debtor. The applicability of discharge under section 727 is confined to chapter 7 cases. Section 727 codifies that unless one or more of the specific grounds for denial of a discharge enumerated in paragraphs (1) through (12) of section 727(a) exists, the court must grant a discharge to a chapter 7 debtor. In addition, unless excepted from discharge under section 523 of the Bankruptcy Code, section 727(b) specifically sets forth the extent of the discharge for a Chapter 7 debtor.
Section 523(a) of the Bankruptcy Code expressly excepts various categories of debts from the discharge granted under section 727. Under section 523(a) there are twenty-one exceptions. Section 523(a)(2)(A) provides that section 727 will not discharge an individual debtor from any debt “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, other than a statement respecting the debtor’s or an insider’s financial condition.” The purpose of this provision is to ensure that relief goes solely to honest debtors. However, in order for the exception to apply, the debtor’s fraud must result in a loss of property to the creditor. Further, it is also necessary that the other party relied on the representation.
The frauds included in section 523(a)(2)(A) are those that show moral turpitude or intentional wrong. Courts have found that if the fraud is absent of bad faith or immorality, it is not “false pretense of false representations” for the purposes of section 523(a)(2)(A). Additionally, the Sixth Circuit has held that when determining whether a particular debt falls within the exception under 523(a)(2)(A), the statute should be construed against the objecting creditor and liberally in favor of the debtor. This construction of the statute has been found to be consistent with the liberal spirit of the bankruptcy system.