Desperate people do desperate things when they are in need of money. Many debtors lie about their finances when they fill out credit applications. These same debtors get in so much debt that they end up filing for bankruptcy, with the mindset that bankruptcy is an easy way out of their financial obligations.
Sophisticated creditors review debtors’ bankruptcy schedules and credit applications, and subpoena other creditors’ business records. If it is determined, after reviewing the bankruptcy schedules, credit application, and subpoenaed records, that a debtor misstated his or her financial obligations in a credit application, a debtor may not be able to discharge an obligation in bankruptcy court and a creditor could be entitled to its attorney’s fees and costs.
Recently, a Mississippi debtor learned this lesson the hard way.
On July 16, 2015, Jeanette Peters (“Peters”) filed for a Chapter 7 bankruptcy, including a $3,400.00 debt for Hometown Credit, LLC (“Hometown”). In re Peters, 2016 Bankr. LEXIS 3402, *3 (Bankr. S.D. Miss. Sep. 16, 2016). Hometown did its due diligence and determined, after reviewing the schedules, credit application, and subpoenaed records from other creditors, that Peters omitted several obligations to various payday lenders in her credit application. Id.
Hometown would have never loaned Peters money if she had disclosed these obligations in her credit application. Id. at *4-5. Instead of filing a proof of claim, Hometown brought a non-dischargeability action asserting that Peters omitted several debts from her credit application. Id. at *2.
The Bankruptcy Code exempts from discharge “[d]ebts ‘for money, property, services, or extension, renewal, or refinancing of credit’ obtained by use of a written statement ‘(i) that is materially false; (ii) respecting the debtor’s . . . financial condition; (iii) on which the creditor to whom the debtor is liable for such debt reasonably relied; and (iv) that the debtor caused to be published with intent to deceive’ are exempted from discharge.” Id. at *5(quoting 11 U.S.C. §523(a)(2)(b)).
In this case, the bankruptcy court found that Hometown proved by a preponderance of the evidence all four (4) parts of the above-mentioned test. Moreover, “[a]lthough ‘the Bankruptcy Code does not expressly award attorney’s fees to a creditor who successfully contests the dischargeability of his claim, . . . creditors are entitled to recover attorney’s fees in bankruptcy claims if they have a contractual right to them under state law.”’ Id. at *9(quoting In re Jordan, 927 F.2d 221, 226-27 (5th Cir. 1991)).
As a result of misstating her obligations in her Hometown credit application, the bankruptcy court found that Peters’ $3,400.00 Hometown balance was not dischargeable in bankruptcy court and that Peters had to pay Hometown’s attorney’s fees, which will likely be in excess of $3,400.00.
Creditors should review their credit applications and debtors’ bankruptcy schedules when debtors file for bankruptcy. If it appears that a debtor failed to disclose certain obligations in a credit application, a creditor should subpoena business records from the other creditors listed in a debtor’s bankruptcy schedules. Once it is determined that a debtor misstated his or her obligations in a credit application, a creditor has the right to file a non-dischargeability action and seek to have a debt ruled non-dischargeable along with its attorney’s fees and costs.
Creditors would do well to keep this valuable nugget in mind.
To find out how the attorneys and staff at Gill Law Firm may assist your company in collecting any unpaid debts, please contact us by phone at (561) 454-0301 or via email at firstname.lastname@example.org.