Fraudulent loan application results in Nondischargeable debt.

In this case, two debtors applied for and closed on a mortgage with American General Finance, Inc. (hereinafter “American General”).

The debtors represented to American General that they only had one mortgage on their residence. American General intended to grant the debtors a loan secured by a second mortgage; American General obtained a title search on the debtors’ property which only disclosed one existing mortgage.

Two days prior to closing on the loan with American General, the debtors issued a second mortgage to another party without informing American General.

Debtors filed bankruptcy and American General filed an adversary complaint with the bankruptcy court alleging their undersecured debt should be nondischargeable.

The court found that:

the debtors’ failure to disclose information on their loan application that a second mortgage on their home already issued, rendered the loan nondischargeable under the exception to discharge for false financial statements; creditor’s title search had not revealed the second mortgage because it had been given two days before the loan closing, and debtor-wife had been employed in a loan department at a bank and was, thus, aware of the importance of accurate disclosure of financial information.  American General Finance, Inc. v. Steinbrunner, 149 B.R. 484.

Author: Charles R. Harroun, Attorney at Law