In the bankruptcy case of Johnson, John R. and Tobie A.; In re (Build¬ers Warehouse Inc. v. Johnson), a creditor attempted to exempt a debt from bankruptcy discharge saying that the debtor had not intention of repaying the debt when he promised to do so.
The details of the bankruptcy case:
The debtor-husband operated a construction company that had a long-term relationship with the plaintiff, a supplier of construction materials. During the relevant time, the debtor had an account for each of three homes he was working on and a general account. When the time came to sell one of the homes, the debtor arranged for the plaintiff to release its lien in exchange for $40,000 and a promissory note in the amount of $28,973. The plaintiff said it agreed to accept a note instead of complete payment because the debtor promised to cash in a life insurance policy to satisfy the note within 21 days. The debtor said he planned to borrow against the policy, but found out he could get only $14,000 that way. The debtor didn't pay the note as promised. A few months later, he borrowed against the insurance policy but did not use any of the loan proceeds to make a payment on the note. Instead he used the money to pay another creditor.
Although the debtor failed to repay the account as he promised he did make some payments , (a total of $16,187) and the creditor continued to extend credit to the debtor until it became clear that the debtor had exhausted all of his financial resources. After the debtor filed bankruptcy, the creditor attempted to exempt the debt from bankruptcy discharge
The court ruling:
The court also found that the plaintiff did not justifiably rely on any promise the debtor made after he failed to pay the promissory note within 21 days. In addition, the plaintiff continued to extend credit to the debtor after it conducted its own investigation of his credit sources and determined that he had a line of credit with a local bank. Consequently, the court found that the plaintiff did not rely on the debtor's representations of payment, but on its own investigation.
Many debtors can find themselves in this type of situation. A debt can be exempted from discharge if the debtor accrued the debt with no intention to repay it. However, if a debtor proves that he/she intended to pay (i.e. making payments) the debt will be eligible for a possible bankruptcy discharge. This is why it is important that debtors do not accrue any debt after they have decided to file bankruptcy. If the bankruptcy court determines that a debtor accrued debt with the intention of discharging it in bankruptcy, the debt will not be eligible for a bankruptcy discharge and/or the bankruptcy case may be dismissed.