Section 523(a)(2)(A) of the Bankruptcy Code provides that a debtor may not receive a discharge for debts found to be incurred by fraud. It is well-settled that if a debtor borrowed money intending not to repay it, the debt is non-dischargeable. But what happens when the debtor-borrower misrepresents the purpose of the loan? That is, when the borrower tells the lender he needs the loan for x, but all the time he really intended to spend on y?
The Bankruptcy Court for the District of Virginia recently answered this interesting question in Johnson v. Dowling, 2013 WL 684681. That decision held that where the debtor deliberately fails to use the loan proceeds for the purpose represented to the lender, the debt is non-dischargeable, even where the debtor always intended to repay the loan.
Note, however, that the lender must still prove – by the “clear and convincing” evidence standard required in fraud actions – that the debtor intended to use the proceeds for something other than what was represented to the debtor, at the time the loan was made. Although the creditor must still prove the common law elements of fraud, the Dowling case can provide another mechanism for non-dischargeability where the facts warrant.
This post was written by attorney Rick L. Knuth