Define: Defalcation

Defalcation is a legal term that refers to the misappropriation or misuse of funds or assets entrusted to someone’s care, often in a fiduciary capacity. It involves the failure to properly account for or handle money or property, resulting in financial loss or harm to another party. Defalcation can occur in various contexts, such as in business transactions, trustee relationships, or estate administration. Individuals found guilty of defalcation may face civil liability, criminal charges, or professional sanctions, depending on the severity of the misconduct and applicable laws. The term emphasises the breach of trust and responsibility associated with handling others’ resources.

Defalcation is a term used by the United States Bankruptcy Code to describe a category of bad acts that taint a particular debt such that it cannot be discharged in bankruptcy.

The division is different from both criminal and civil rules describing permitted and unpermitted acts. Thus, parking fines garnered through illegal parking are generally dischargeable, but fines levied as part of a criminal conviction for drug trafficking generally are not. Similarly, debts of a civil (non-criminal) nature that are acquired through entirely legal means may not be dischargeable if discharge would allow a debtor to easily calculate declaration of bankruptcy into a profitable financial plan (e.g. by accumulating large cash advances before filing). The term is also used in legal proceedings outside of bankruptcy to refer more generally to embezzlement; it is often used in the context of the title insurance business. A title agent who misuses funds intended to be used to close insured transactions is said to be involved in a defalcation.

Many title insurers have their own “defalcation units.”

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 29th March, 2024.