Bankruptcy may not be the most exciting branch of the law, but it has the virtue of being complicated by rules that sometimes appear to contradict one another. When two laws appear to contradict one another, it is known as an antinomy. Now, the SCOTUS will hear a bankruptcy case related to the discharge of a debt incurred by a wife by her husband who committed fraud.

Under the law, those who incur a debt by fraud cannot use the bankruptcy system to discharge it. However, what happens if the debt is attached to the estate of someone who did not commit the fraud? At present, we do not have an answer to that question so the Supreme Court will have to render a decision on whether or not a woman will be forced to pay for her husband’s fraud debt.

What Happened?

According to the suit, the husband sold the house to another party, but the party was displeased with the quality of the home and felt that the couple did not make a full disclosure on the condition of the property prior to the sale. Eventually, the purchaser won a judgment against the couple, which was attached to the marital estate. That meant that both husband and wife were responsible for the debt. However, the wife had no knowledge that the husband was cutting corners and misrepresenting the condition of the property. She argued that since she did not commit fraud, she should be allowed to discharge the debt in bankruptcy. At present, the SCOTUS is considering whether or not to authorize the discharge. 

However, the initial judgment was found in favor of the wife. The court ruled that while the debt was incurred by fraud, the rules of bankruptcy only prevent a judgment from being discharged if the petitioner committed the fraud. In this case, the wife did not commit fraud, and so the bankruptcy court authorized the discharge. On appeal, however, the appellate court reversed course and decided that it didn’t matter who committed the fraud. The judgment could not be discharged. 

The matter was appealed again, and now the SCOTUS will decide whether or not the judgment can be discharged. 

Who Wins?

It is hard to say. SCOTUS will have to reach a decision. That decision will come down to whether or not the court believes that the debtor’s frame of mind is important (an honest versus a fraudulent debtor) or the act of fraud precludes a bankruptcy discharge ever, regardless of who committed the fraud. So, should the decision be made on the grounds of the debtor or the debt? 

In a case like this, the decision could go either way. So, for bankruptcy attorneys, this is exciting stuff.

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Chris Arrington represents the rights of Pennsylvania debtors in bankruptcy filings. Call today to schedule an appointment, and we can begin discussing your options immediately.