man frustrated about bankruptcy

Will Filing For Bankruptcy Give You A Fresh Start If Your Spouse Committed Fraud?

When you get married, you pledge that you will love your spouse for better, for worse, for richer, for poorer, in sickness and in health, until parted by death. But this is easier said than done… especially if your spouse commits fraud, hides it from you, and even filing for bankruptcy may not help you get your financial life back on track. 

The United States Supreme Court is currently debating how to treat spouses in this very situation in a case called Bartenwerfer v. Buckley. Their decision will have an impact on a wide variety of personal bankruptcy cases, including those filed here in the Milwaukee area. 

Flipping Fraud

The case involves the sale of a house in San Francisco that David and Kate Bartenwerfer fixed up and flipped to Kieran Buckley. David was directly involved in the home’s rehab and sale, but his wife Kate was not. 

After the sale closed, Buckley sued the couple for failing to disclose the home’s major defects on the standard-form Transfer Disclosure Statement. Buckley won his lawsuit, and shortly thereafter, the Bartenwerfers jointly declared bankruptcy. 

Section 523(a)(2)(A) of the Bankruptcy Code prevents the discharge of any creditor’s claim for “money … obtained by … actual fraud.” So, the Bartenwerfer’s debt to Buckley typically could not be discharged. However, Kate successfully persuaded the bankruptcy court that she should not be liable for the debt, even if her husband David was, since she was unaware of the fraudulent acts her husband committed. 

Buckley appealed, and the Ninth Circuit overturned the bankruptcy court’s decision, ruling that Kate’s actual knowledge of her husband’s business dealings was irrelevant since they were married and acting as partners in the transaction. 

The Supreme Court Takes The Case 

Kate Bartenwerfer appealed to the United States Supreme Court, which heard oral arguments in the case on December 6. The Justices must decide if the statute above protects creditors when the debt owed to them is tainted by any sort of fraud, or whether the debtor needs to know fraud has been committed in order for the statute to kick in. 

The Justices zeroed in on the text of the statute, which focuses on the debt, not the mental state of the debtor. This does not bode well for Kate and other innocent or financially unsophisticated people tied to debt incurred by their spouse. 

What happens next? 

An opinion in the case is expected by the end of June. The Hanson & Payne team is keeping an eye out for it because the ruling will impact cases where spouses file bankruptcy jointly and any sort of fraud is alleged. 

There aren’t a tremendous number of bankruptcies filed in Milwaukee where creditors allege fraud occurred, but it is not unheard of. But there are many personal bankruptcy cases that are filed jointly, where one spouse was kept in the dark about the couple’s finances. The Supreme Court’s ruling may dictate how both types of cases are resolved going forward. 

A Milwaukee Area Bankruptcy Firm You Can Trust

Hanson & Payne is a full-service bankruptcy law firm based in Milwaukee. We help debtors and creditors navigate the bankruptcy process and chart a path forward. Please contact us today to schedule a meeting.