Bankruptcy offers relief to people and businesses in financial distress, allowing them to pay down debts over a period of time, or pay them down quickly by liquidating assets. A court may then grant a discharge of some unpaid debts. The bankruptcy process is not, however, supposed to give people a way out of debts incurred because of dishonest or unlawful acts. Congress has placed provisions in the Bankruptcy Code that except certain types of debt from discharge. A California district court recently considered the appeal of creditors who alleged that their claim against a debtor was excepted from discharge because it involved false pretenses. In re De Long, No. 2:14-cv-02947, order (E.D. Cal., Jan. 7, 2016).
The Bankruptcy Code bars a wide range of debts from discharge. 11 U.S.C. § 523(a). In some cases, such as child support obligations and student loans, an entire class of debt is excepted from discharge. Other exceptions are based on the manner in which the debtor incurred the debt, including debts for something of value “to the extent obtained by…false pretenses, a false representation, or actual fraud…” Id. at § 523(a)(2)(A). Creditors may ask a bankruptcy court to find that a debt is not subject to discharge under this section, after providing notice to all parties and conducting a hearing. Id. at § 523(c)(1).
The debtor in the De Long case owned and operated a construction company in Sacramento, California. The creditors, a married couple, hired the company to work on their home. The original contract between the parties, signed in June 2010, included a total project cost of $246,000 and a payment schedule. The creditors eventually paid the construction company a total of $189,400, but they hired another contractor in late 2011 to complete the job.