Can Fraud Issue Be Raised For The First Time in Bankruptcy Court

While bankruptcy allows individuals in need of a fresh financial start to discharge many of their debts in bankruptcy, certain categories of debts are nondischargeable. Some debts are automatically not dischargeable, such as child support or criminal fines. Others types of nondischargeable debts though, such as loans obtained through fraud, place the burden of proof on the creditor to convince the bankruptcy court that he or she should be allowed to collect the debt.

Thus a bankruptcy attorney will sometimes find it necessary to defend an adversary action filed by a bank or a credit card company, seeking to hold the debt nondischargeable on the grounds of fraud. However, often by the time an individual files a bankruptcy, a creditor has already brought a lawsuit in a state court to collect the debt, and the question can arise whether he can claim fraud in his bankruptcy claim, when he never brought the matter up in the state court.

In most cases the bankruptcy courts have ruled that not having previously complained of fraud does not permanently bar pleading the grounds in a bankruptcy action. The courts realize that as a practical matter, whether fraud existed or not, the creditor has little reason to raise the issue in state court, when all he has to prove is that the money is owed, and the judges tend to believe that it would be unfair to permanently bar the creditor from raising the argument, merely because he or she failed to anticipate the subsequent bankruptcy filing.