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38 Stan. L. Rev. 891 (1985-1986)
The Fraud Exception to Discharge in Bankruptcy: A Reappraisal

handle is hein.journals/stflr38 and id is 907 raw text is: The Fraud Exception to Discharge in Bankruptcy: A Reappraisal The principal reason most individual debtors seek the protec- tion of the bankruptcy laws is to discharge their debts.' Federal bankruptcy law expressly aims at granting the insolvent debtor a fresh start,2 and the Bankruptcy Code's3 discharge policy re- I. D. BAIRD & T.JACKSON, CASES, PROBLEMS AND MATERIALS ON BANKRUPTCY 730 (1985). See also S. RIESENFELD, CREDITORS' REMEDIES AND DEBTORS' PROTECTION 729 (3d ed. 1979) (the availability of discharge is the cause of the recent boom in consumer bankruptcies). Discharge policy applies only to individuals. See 11 U.S.C. § 727(a)(I) (1982). Corpora- tions do not need a discharge in bankruptcy because they can simply dissolve under state law. Their shareholders are similarly protected because state limited liability laws provide the equivalent of a discharge. See Posner, The Rights of Creditors of Affiliated Corporations, 43 U. CHI. L. REV. 499 (1976). In filing a petition for bankruptcy, the individual debtor may proceed under either Chap- ter 7 or Chapter 13. Under Chapter 7, typically called liquidation or straight bankruptcy, the debtor surrenders his assets to a trustee to be converted into cash for distribution to his creditors. In exchange, the debtor receives a discharge from all his debts. The debtor is entitled, however, to exempt certain assets from surrender, including substantial interests in his residence, motor vehicle, and other specified personal property. See I 1 U.S.C. § 522 (1982). See generally Vukowich, Debtors' Exemption Rights Under the Bankruptcy Reform Act, 58 N.C.L. REV. 769 (1980). Alternatively, a debtor may file under Chapter 13, which allows him to keep all of his assets, but requires that he pay at least part of the accumulated debt out of future earnings. 11 U.S.C. § 1322 (1982). At the end of such a repayment plan, the debtor is discharged of any remaining indebtedness. 11 U.S.C. § 1328(a) (1982). See generally M. GIRTH, BANKRUPTCY OPTIONS FOR THE CONSUMER DEBTOR (1981). The fraud exception to discharge applies only to Chapter 7 liquidations. Compare 11 U.S.C. § 523(a)(2) (1982) with 11 U.S.C. § 1328(a) (1982). Accordingly, this note restricts itself to a consideration of individual bankruptcies brought under Chapter 7. 2. The United States Supreme Court gave classic expression to this fresh start policy: One of the primary purposes of the Bankruptcy Act, is to 'relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.' Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). The legislative history of the Bankruptcy Reform Act of 1978 reiterates this policy: The purpose of straight bankruptcy. . . is to obtain a fresh start, free from creditor harassment and free from the worries and pressures of too much debt. H.R. REP. No. 595, 95th Cong., 1st Sess. 125, reprinted in 1978 U.S. CODE CONG. & AD. NEWS 5963, 6086. The most comprehensive analysis of this fresh start policy is Jackson, The Fresh-Start Pohcy in Bankruptcy Law, 98 HARV. L. REV. 1393 (1985). 3. In this note, the Code refers to the Bankruptcy Reform Act of 1978 (codified at I 1 U.S.C. §§ 101-151326 (1982)). The Code was amended in 1984 by the Bankruptcy Amend- ments and Federal Judgeship Act, Pub. L. No. 98-353, 98 Stat. 333 (1984) (amending scat- tered sections of 11 U.S.C. §§ 101-151326).

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