If the benefits of bankruptcy are designed to flow to the “honest but unfortunate debtor”, what, then, of the dishonest debtor? We sometimes encounter creditors who believe that any breach of a contract is evidence of dishonesty on the debtor’s part, but bankruptcy courts take a much narrower view of dishonesty, requiring proof, essentially, that the debtor induced the creditor to extend credit to him on some kind of false pretense or without any intent to repay the debt. This is a hard standard for creditors to meet, but, until recently, there was a long-established rule that if one spouse committed the fraud, then the fraud was imputed to the innocent spouse. After 129 years, that rule appears to be eroding.
In the recent ruling in Haig v. Shart, it was held that imputing the fraud of one person to another was “hostile to the well accepted principle that Congress intended to enact bankruptcy law ‘by which the honest citizen may be relieved from the burden of hopeless insolvency.'” What this means, practically, is that in a discharge-ability action against a married couple, the liability of each spouse is determined according to each one’s individual knowledge and actions regarding the loan in question. A dishonest husband and a dishonest wife might exit their bankruptcy case having received disproportionate relief based on their pre-bankruptcy behavior.