United States Bankruptcy Code § 523(a)(2) provides in part:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive . . .

11 U.S.C. § 523(a)(2)(A) and (B).

For a debt to be nondischargeable under section 523(a)(2)(A), the creditor must show (1) that the debtor made a representation; (2) that the debtor knew the representation was false; (3) that the representation was made with the intent to deceive the creditor; (4) that the creditor actually and justifiably relied on the representation; and (5) that the creditor sustained a loss as a proximate result of its reliance.

To satisfy the scienter (intent or knowledge of wrongdoing) requirement, the debt must be one obtained by fraud involving moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made.

An intent to deceive may be inferred from a reckless disregard for the truth or falsity of a statement combined with the sheer magnitude of the resultant misrepresentation, but an honest belief, even if unreasonable, that a representation is true and that the speaker has information to justify it does not amount to an intent to deceive. Thus, a "dumb but honest" defendant does not have scienter.

Justifiable reliance incorporates the qualities and characteristics of the particular plaintiff and the circumstances of the particular case, rather than of the application of a community standard of conduct in all cases.

Thus, in measuring justifiability of reliance, as required for a fraud or negligent misrepresentation claim, the court must inquire whether, given a fraud plaintiff’s individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud, it is extremely unlikely that there is actual reliance on the plaintiff's part. All exceptions to discharge under §523 must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start.

Actual fraud, by definition, consists of any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another—something said, done or omitted with the design of perpetrating what is known to be a cheat or deception.

In order to prove nondischargeability under an actual fraud theory, the objecting creditor must prove: (1) the debtor made representations; (2) at the time they were made the debtor knew they were false; (3) the debtor made the representations with the intention and purpose to deceive the creditor; (4) that the creditor relied on such representations; and (5) that the creditor sustained losses as a proximate result of the representations.

Under § 523(a)(2), false representations and false pretenses encompass statements that falsely purport to depict current or past facts. A promise to perform acts in the future is not considered a qualifying misrepresentation merely because the promise subsequently is breached.

A debtor's misrepresentations of his intentions, however, may constitute a false representation within the meaning of the dischargeability provision if, when the representation is made, the debtor has no intention of performing as promised.

Under the United States Bankruptcy Code, specifically 11 U.S.C. § 523(a)(2), certain debts are not discharged in bankruptcy if they were obtained through fraud or false pretenses. In Wisconsin, as in other states, this federal law applies and sets forth that a debtor will not be relieved of a debt if it was acquired by making false representations or through actual fraud. To have such a debt declared nondischargeable, a creditor must demonstrate that the debtor made a false statement with knowledge of its falsity, intended to deceive the creditor, and that the creditor justifiably relied on this statement, resulting in a loss. The intent to deceive can be inferred from a reckless disregard for the truth. However, an honest belief in the truth of the statement, even if unreasonable, does not constitute intent to deceive. The reliance by the creditor must be justifiable, considering the creditor's characteristics and the circumstances. All exceptions to discharge are interpreted in a manner that favors the debtor to ensure they can achieve a fresh start, except when a creditor can clearly establish the elements of fraud as required by the statute. Actual fraud involves active deceit with the intention to cheat another party. For a debt to be nondischargeable under an actual fraud theory, the creditor must prove the debtor made false representations with knowledge of their falsity, intent to deceive, reliance by the creditor on these representations, and subsequent loss due to this reliance. Statements of intent to perform future actions are generally not considered false representations unless the debtor had no intention of performing at the time the promise was made.