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Legal Memorandum: Exceptions to Dischargeability of Debts

Issue: Under which circumstances may a spouse not discharge debt incurred through wrongful conduct of other spouse?

Area of Law: Bankruptcy & Creditors Rights
Keywords: Dischargeability of debts; Wrongful action; Spouse
Jurisdiction: Federal
Cited Cases: 726 F.2d 452
Cited Statutes: 11 U.S.C. § 523, 523(a), 523(a)(2), 523(a)(6), 523(a)(4)
Date: 11/01/2006

The bankruptcy code sets out a number of exceptions to the usual dischargeability of debts at 11 U.S.C. § 523.  To establish nondischargeability of a particular debt, the burden is on the creditor to establish each element by the “preponderance of the evidence.”  Grogan v. Garner, 498 U.S. 279, 289-90 (1991) (rejecting “clear and convincing” standard formerly imposed by some lower courts).     

Provision 11 U.S.C. § 523(a)(2) denies a debtor dischargeability if the debt was procured by fraud.  In re Walker, 726 F.2d 452 (8th Cir. 1984), is a seminal case on whether and under what circumstances the passive spouse may be denied dischargeability of a debt created primarily by the more active spouse’s fraud.  In Walker, the husband-debtor owned a hardware store.  When he became ill his debtor-wife began operating the store and in the course of operations obtained funds by fraud and used them to pay the store’s expenses as well as personal expenses.  The creditor attempted to deny dischargeability against the husband pursuant to § 523(a)(2). 

The bankruptcy court held in favor of the creditor.  The Eighth Circuit remanded for further factual findings holding that where (1) the passive spouse knew or had reason to know of the more active spouse’s wrongdoing, or was recklessly indifferent to that spouse’s act; and (2) the active wrongdoer was acting as agent of the passive spouse, the debt may be nondischargeable as to the passive spouse as well as to the more active wrongdoer.  Id. […]

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