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Justices clarify the concept of defalcation

Like divorce, bankruptcy is not generally a process anyone should approach without first receiving the counsel of an experienced attorney. Bankruptcy law is sometimes frustratingly complex and failure to understand its nuance can lead to costly bankruptcy mistakes. One mistake that some bankruptcy filers engage in even without realizing it is defalcation.

When personal or business debt has begun to spiral out of control, many individuals and business owners seek the protections that bankruptcy has to offer. Bankruptcy can allow these filers a fresh start by reorganizing debt, discharging it or both. Because these protections are so significant, the law is very clear that all debts involved in the process must be free of any signs of fraud or embezzlement.

However, these debts must also be free of defalcation. The U.S. Supreme Court recently helped to clarify exactly what this restriction means and how evidence of it can affect those seeking bankruptcy protections. In the past courts have blocked the ability of filers to obtain bankruptcy protections because there has been some evidence that funds leading to the filers' debt were misused fairly generally. The Court has now concluded unanimously that the test for defalcation must be far more stringent.

In essence, judges can no longer rule that defalcation has occurred unless sufficient evidence is presented suggesting gross negligence has occurred or knowledge of improper conduct was had on the part of the affected trustee. This more stringent standard will hopefully help an increased number of deserving individuals receive the bankruptcy protections they deserve without unjustified hurdles blocking their paths.

Source: Thomson Reuters News & Insight, "Justices finally say what 'defalcation' means," Lawrence Hurley, May 14, 2013

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