perpetrator or participant in a fraud is pursued civilly, he or she
often files for protection in the bankruptcy courts. If Chapter 13
is available, intentional fraud cannot be discharged but other types
of fraudulent acts can be. Often the victim wants to teach the
perpetrator a lesson and appears in the bankruptcy court even though
the chance of recovery is small. The victim hopes either to eject
the perpetrator from the protection of the bankruptcy court
protection, obtain a exception from discharge, or win a
Victim Rights in Bankruptcy
There are several possible
courses of action against the perpetrator in bankruptcy but often
there is little guarantee of success. "Success" usually means
obtaining a nondischargeable judgment which can last a total of 20
years in the states of Oregon and Washington. The victim has 20
years to keep track of the perpetrator and attempt to collect the
judgment. Collection costs can be expensive and rarely are recovered
from the perpetrator.
Under 523(a)(2) the victim must prove
that the perpetrator committed the fraud "intentionally" with
knowledge that his conduct was fraudulent. 523(a)(4) disallows
certain fiduciaries from discharging the debt.
In securities fraud cases, the perpetrator generally claims to have been also fooled by
the fraud and points to the fact that he sold the fraudulent
investment to his own friends and family. The Sarbanes Oxley Act
added a provision to protect investors (523(a)(19)) from discharge
for violation of securities laws. Most state securities laws do not
require proof of intent for a civil (noncriminal) violation of the
Preventing the Discharge in Bankruptcy
In order to protect your rights under Section 523
of the Bankruptcy Act (the anti-discharge provisions), the victim
must sue the debtor in bankruptcy. This separate lawsuit can be less
expensive that bringing the action in other courts depending on the
facts and circumstances. Despite the difficulties, it is
sometimes justified to fully explore the possible action that could
be take against a perpetrator or participant in a fraud who files
for bankruptcy protection. It may be possible to obtain a
nondischargeable judgment that follow the perpetrator for 20 years. Tollefsen Law PLLC can assist with
evaluation of your options.
Debtor fails to schedule debt or property
One of the recurring issues faced when pursing a fraud perpetrator in
bankruptcy court is the failure to list
claims or property. The rules are complex and require expertise.
Using bankruptcy to avoid a court order
It can be an abuse of the bankruptcy laws to file
a bankruptcy petition merely to avoid complying with a court order.
If the bankruptcy court is convinced the filing is in bad faith, the
petition can be dismissed.