Discharging Debts From Scams in Bankruptcy

In the case of Guillet, Glen G. and Cheryle A.; In re ( Neary, U.S. Trustee, v. Guillet) ,(Bankr. E.D. Tex. 2008) a bankruptcy court overruled a bankruptcy trustee who denied a Chapter 7 discharge to a debtor who incurred debts because of a Nigerian scam.

The debtor sank almost $1.3 million (using mostly credit and loans from friends) into a Nigerian scam in the hopes that he would receive over $30 million in profit. The bankruptcy trustee in the case attempted to deny the debtor a Chapter 7 bankruptcy discharge because he deemed that the debtor engaged in fraud.

But a bankruptcy court overturned the ruling saying that the debtor should be allowed a bankruptcy discharge because he did not willfully and knowingly engage in fraud.

The Bankruptcy Judge Bill Parker said:

“Ad­mittedly, there is something fundamentally appealing about the concept that when a person owes money to others, that person cannot be allowed the luxury of lunacy. But that is not the concept that is incorporated into Section 727(a). A discharge is denied only for actual, actionable fraud, and that simply does not exist in this case, notwithstanding the degree of frustration which may arise from the facts demonstrated. The debtor’s behavior in this case is remarkably similar to that of a pathological gambler who, in the face of continuing losses, irrationally feels compelled to continue his gambling because winning the elusive ‘jackpot’ is the only way to repay the debts arising from his gambling. That behavior is delusional and sad, but it is not fraudulent.”

In other words, the debtor filing for bankruptcy truly (albeit foolishly) believed that he would be able to repay his debts because he was going to earn a huge profit on his “investment” therefore it was not fraud on his part. Simply because a debtor has gambled away his money or engaged in foolish financial decisions is not enough to deny a bankruptcy discharge.