U.S. Courts of Appeals disagree on the correct interpretation of the phrase "statement respecting the debtor's . . . financial condition" as it appears in the exceptions to discharge in 11 U.S.C. § 523(a)(2)(A), the fraud provision, and § 523(a)(2)(B), the false written statement provision. Two major viewpoints have emerged-the strict and the relaxed. Under the strict interpretation, for the fraud provisions to apply, the statement must comprise the overall financial condition of the debtor. According to the relaxed interpretation, the debtor's fraudulent assertion of ownership of only a single item of property constitutes a statement respecting the debtor's financial condition. The Fifth, Eighth, and Tenth Circuits have adopted the strict interpretation, while the Fourth Circuit has followed the relaxed interpretation since 1984. Lower courts in other circuits have gone both ways. The divergence of opinion has resulted in some courts allowing debtors who acquired money through fraud or misrepresentation to walk away from those debts by discharging them in bankruptcy, while others hold such debtors accountable and refuse discharge. This Comment interprets § 523(a)(2) and concludes that the correct reading of "financial condition" is the debtor's overall financial health-the view of the courts that have adopted the strict interpretation. This Comment further proposes adding a definition of "financial condition" to 11 U.S.C. § 101 to resolve the circuit split. This split jeopardizes the dual purposes of bankruptcy-to provide relief to honest debtors and to ensure the fair treatment of creditors. As it is, in some jurisdictions debtors who commit fraud are allowed to abandon their debts, leaving creditors in a lurch. Burning creditors in this way may result in negative repercussions for other debtors, such as decreased borrowing ability. Providing a clear definition of "financial condition" will help promote better bankruptcy policy for debtors and creditors.
Debtors as Predators: The Proper Interpretation of "a statement respecting the debtor's . . . financial condition" in 11 U.S.C. § 523(a)(2)(A) and (B),
Emory Bankr. Dev. J.
Available at: https://scholarlycommons.law.emory.edu/ebdj/vol30/iss2/9