When Does Failure To Repay Loan Amount to Theft?

When someone borrows money from another person and then is unable, or simply unwilling, to pay back the loan the lender can feel that the borrower stole his money or defrauded him out of money. Can a creditor challenge the Chapter 7 bankruptcy discharge of a personal loan on the basis of theft, fraud, embezzlement, or like theory? I read a recent bankruptcy decision that discussed when non-payment of a loan amounts to a theft or fraud.

Borrowing money from someone and not paying it back may seem like theft, but legally simply failing to give back money borrowed is not criminal and is a dischargeable debt. However, if someone takes another’s money with the prior intent to deceive or defraud the lender then the act amounts to theft or embezzlement. If a debtor took someone’s money with initial intent to steel the money or defraud the lender then the debt is not dischargeable in bankruptcy. Taking money from someone with the actual intent to harm the lender is non-dischrgeable under bankruptcy as an act intended to injure or harm a creditor.

Where facts show that someone borrowed money and initially used the loan proceeds for the stated purpose of the loan, and where the borrowed attempted for a reasonable time the bankruptcy court will tend to discharge the loan as a contract debt for money obtained without criminal intent.

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