Creditor Pursuit Against Fraudulent
Debtors:
Exploring the § 523(a)(2)(B) Exception to
Discharge in Bankruptcy
When A Debtor Uses A Personal Financial
Statement to Secure Credit
By: Elizabeth C. Green, RBE Attorney
O
ne of the basic purposes of the Bankruptcy
Code (the “Code”) is to give insolvent
debtors a fresh start. However, the Code does
require that such debtors are honest. To that end,
the Code provides certain exceptions to discharge
of debt. The exception outlined in Section 523(a)
(2)(B) may come into play when a debtor has
made use of a false personal financial statement
(“PFS”) in securing credit and now seeks a
discharge in bankruptcy of the associated debt.
The debtor may have borrowed funds directly or
guaranteed repayment of the debt by a third party.
As discussed below, in order to prevail, a creditor
must timely object to discharge and prove each
required statutory element.
A. Timely Objecting to Discharge
Pursuant to Rule 4007(c) of the Federal Rules
of Bankruptcy Procedure, a creditor must object
to discharge of the debt within 60 days after the
first date set for creditor’s § 341 meeting. This
can be accomplished by initiating an adversary
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proceeding (a lawsuit within the bankruptcy) and
filing a complaint objecting to discharge.
B. Proving the Exception to Discharge
To advance the policy of providing a fresh start
to the debtor, the creditor bears the burden of
proving by a preponderance of the evidence that
the exception to discharge applies. In order to
meet that burden, the following five questions
must be answered with a “yes”:
1
Did the debtor use a statement in writing?
If the debtor completed and submitted a PFS
as part of the credit application process, he or she
will be unlikely to dispute this element.
2
Is the written statement materially false?
Courts have defined “material falsity” as
“an important or substantial untruth” and have
described a materially false statement as “one
that paints a substantially inaccurate picture of a
debtor’s financial condition by misrepresenting
information of the type which normally would