To amend title 11, United States Code, to clarify the rules for the exceptions to the discharge of the debt of an individual debtor, and for other purposes.
- Sponsor
- Rep. Correa, J. Luis [D-CA-46]
- Committees
- Judiciary Committee (primary)
- Last action
- Oct 5, 2026
Bottom line
This bill tightens the criteria for excepting certain debts from discharge in individual bankruptcy cases by requiring direct personal involvement of the debtor in the wrongful conduct.
What it actually does
This bill amends Section 523(a) of title 11, United States Code (the Bankruptcy Code), to explicitly state that certain debts are non-dischargeable only when the underlying fraudulent conduct, false representation, defalcation, embezzlement, or larceny was "committed by the debtor." This clarification aims to ensure that the debtor must have personally engaged in the prohibited actions for the debt to be excepted from discharge.
Proponents argue
Proponents argue this bill provides necessary clarity to bankruptcy law, ensuring that individuals are only held accountable for their own direct fraudulent actions or misconduct. This prevents situations where a debtor might be denied discharge due to actions of others, such as partners or agents, which could lead to unjust outcomes and hinder a fresh start. It promotes fairness and predictability in bankruptcy proceedings.
Opponents contend
Opponents might argue that this clarification could inadvertently narrow the scope of non-dischargeable debts, potentially allowing debtors to escape responsibility for debts arising from misconduct where they were complicit or benefited, even if they didn't personally execute every step of the fraud. This could make it harder for creditors to recover losses from fraudulent schemes where the debtor played a key role but perhaps delegated specific actions.
The bill is very short and straightforward, making it easily accessible for any reader to understand its direct legislative changes.
Section 1(1)(A) and (B) of the bill, amending 11 U.S.C. 523(a)(2)(A) and (B)
Explicit Attribution of Debtor's Conduct for Fraud-Related Debts
This provision amends the Bankruptcy Code to specify that debts arising from "false pretenses," "false representation," or "actual fraud" are non-dischargeable only if these actions were "used by the debtor" or "made by the debtor." Similarly, debts obtained by "use of a statement in writing" concerning financial condition are non-dischargeable only if that "use" was "by the debtor." This clarifies that the debtor must have personally engaged in the fraudulent conduct for the debt to be excepted from discharge.
Supporters argue
Supporters argue this ensures fairness by preventing debtors from being held liable for the actions of others, promoting a true "fresh start" for individuals who may have been tangentially involved or victims of others' fraud. It aligns the law with the principle that personal responsibility should be tied to personal conduct.
Critics contend
Critics might contend that this could create loopholes, allowing debtors who orchestrate or significantly benefit from fraudulent schemes carried out by others (e.g., employees, partners) to discharge debts that should rightfully be non-dischargeable. This could shift the burden of loss unfairly onto creditors.
Tradeoffs
The bill balances the debtor's right to a fresh start against the creditor's right to protection from fraudulent conduct. It aims to prevent overly broad interpretations of fraud exceptions while potentially making it more challenging to hold debtors accountable for indirect involvement in misconduct.
Section 1(2) of the bill, amending 11 U.S.C. 523(a)(4)
Explicit Attribution of Debtor's Conduct for Fiduciary Misconduct, Embezzlement, and Larceny
This provision amends the Bankruptcy Code to explicitly state that debts arising from "fraud or defalcation while acting in a fiduciary capacity," "embezzlement," or "larceny" are non-dischargeable only "when committed by the debtor." This ensures that these exceptions apply solely when the individual debtor personally engaged in the specified misconduct, rather than being held responsible for the actions of others.