Debts incurred through fraud

Fraud happens when someone deliberately uses misrepresentation, deception, or dishonesty to gain something for themselves or to deprive someone else of something. It can be a criminal offence. That means it can lead to prosecution.

Fraud is also a civil wrong. In contract law, a finding of fraud means a contract can be set aside by the courts. It is usually called fraudulent misrepresentation when it occurs under a contract.

Fraud offences under legislation

The Fraud Act 2006 makes fraud a criminal offence. It defines fraud as:[1]

• false representation

• failing to disclose information

• abuse of position

Civil law fraud

Fraudulent misrepresentation is a common civil law claim based on fraud.

The courts have interpreted a fraudulent misrepresentation as one where the person giving a false statement either:[2]

• knows it to be false

• does not believe in the truth of it

• is reckless about the truth of it

Types of fraudulent debt

Most types of debts require the debtor to make some type of statement, application, or claim before they can be incurred. That means there is almost always an opportunity for someone to commit fraud.

Examples of debts incurred through fraud could include:

• a credit agreement where the debtor gave false details on the application

• a benefit overpayment where the claimant gave false information in their claim, or did not report a change in circumstances that would affect their entitlement

• court costs where the party incurred them after giving false or dishonest information, especially in a personal injury claim

There is no full list of the types of debts that could be incurred through fraud. Whether fraud has occurred depends on the facts of the case. The court can decide if the parties cannot agree whether fraud has taken place.

Benefit regulations create an offence of dishonest representations that applies to benefit claims.[3]

The DWP can decide to treat a benefit claim as fraudulent. They must follow their internal fraud investigations guide. The DWP can recover a benefit as fraudulent if the claimant was prosecuted for fraud, or has accepted an administrative penalty.[4]

A notice of a recoverable overpayment is not a decision about the claimant's fraud, even if the DWP has stated it believes fraud has taken place. It only states an overpayment has occurred and the DWP will recover it. Most benefit overpayments are not incurred through fraud.

The DWP Fraud investigations guide is available on Gov.uk.

Administrative penalty

An administrative penalty is offered to the benefit claimant as an alternative to prosecution through the courts. It is available when the claimant has received no other fraud penalty in the previous five years.[5]

The claimant can refuse to accept an administrative penalty. The DWP or Local Authority will decide whether to pursue prosecution for fraud through the criminal courts.

Formal cautions are not issued by the police for benefit overpayments. The DWP or local authority uses an administrative penalty as an alternative to a caution.

A debtor is not released from liability for debts they have incurred through fraud when they are discharged from bankruptcy.

When a bankruptcy debt is fraudulent

The Insolvency Act 1986 states the bankrupt is not released from 'a debt incurred in respect of, or the payment of which was avoided by, any fraud or fraudulent breach of trust to which the bankrupt was a party'.[6]

The Insolvency Service provides guidance to Official Receivers about when to treat a debt as fraudulent. The debtor does not always have to have been convicted of fraud. Debts incurred through fraud include those debts which have been tainted by dishonesty.[7] That means there is a lower threshold for treating a bankruptcy debt as fraudulent than would be required to secure a criminal conviction.

The burden of proof is on the creditor to show the debt that is owed to them was incurred fraudulently. They need to show this on the balance of probabilities. If a debtor does not agree, the court can decide whether it was fraudulent or not.

No remedy in respect of the debt before discharge

A creditor cannot recover a bankruptcy debt, including a fraudulent debt, after the bankruptcy order is made and before the date of discharge. This includes deductions from benefits for fraudulent benefit overpayments.[8]

The creditor can recover the debt once the bankruptcy is discharged.

Fraudulent debts are qualifying debts in a debt relief order, but liability for them is not discharged at the end of the moratorium period.[9]

That means the debt must be listed on the application and counts toward the total debt limit.

The burden of proof is on the creditor to show the debt owed to them was incurred through the debtor's fraud.

No remedy in respect of the debt during the moratorium

A creditor cannot recover a qualifying debt, including a fraudulent debt, during the debt relief order moratorium. This includes deductions from benefits for fraudulent benefit overpayments.[10]

The creditor can recover the debt once the debt relief order moratorium ends.

Fraudulent debts are not covered by a breathing space or mental health crisis moratorium. Debts incurred through fraud are defined as non-eligible debts.[11]

A debt advice provider must exclude the debt from the moratorium if it was incurred through fraud, whether the debtor has been charged with or convicted of fraud, or not.

The Insolvency Service guidance to debt advisers on the debt respite scheme is published on Gov.uk.

Creditor review of a moratorium

A creditor can request a review of the moratorium on the grounds of material irregularity if they believe a debt to them has been incurred through fraud.[12] The debt advice provider must carry out a review and decide whether the debt was incurred through fraud.

Evidence of fraud

The debt advice provider must then cancel the moratorium if there is enough evidence.[13]

Insufficient evidence of fraud

The debt advice provider can allow the moratorium to continue if they decide there is not enough evidence to cancel the moratorium on the grounds of material irregularity.

The debt advice provider can also allow the moratorium to continue if it is felt that the debtor’s personal circumstances would make the cancellation unfair or unreasonable.[14]

Where the moratorium continues following a review, the creditor can apply to the County Court for cancellation on the same grounds.[15]