The Practical Lawyer

August 29 - September 4, 2016

No, you can’t discharge everything in bankruptcy

By Ethan Nobles

A few years ago, a fellow showed up in my office because he learned there were some warrants against him for some unpaid fines he picked up when he was found guilty of committing a couple of misdemeanors.

Why weren’t those fines paid? After the court ordered him to pay them, he filed a Chapter 13 bankruptcy petition based in part on his attorney’s assurances those would be discharged.

It always struck me as odd that his Chapter 13 plan was approved – seeing how the fines were clearly and incorrectly listed as nonpriority unsecured debts – but the bankruptcy was filed in the early 1990s. Perhaps, some improper things got overlooked from time to time back then.

The point is, criminal fines are clearly not dischargeable in bankruptcy. Simply put, there are three types of debts listed in a bankruptcy petition – secured, nonpriority unsecured and priority secured. Secured debts are those secured by property and the debtor can either give the property back or make arrangements to pay all or some of the debt. Nonpriority unsecured debts are dischargeable whereas priority unsecured debts are not.

For consumers, there are essentially two types of bankruptcy filings – Chapter 7 and Chapter 13. In a Chapter 7, assets are liquidated, the debtor opts to reaffirm and pay secured debts or let the property go and nonpriority unsecured debts are typically discharged and the creditor is lucky if it receives a few pennies on the dollar (and they often get nothing at all). In a Chapter 13 bankruptcy, the debtor generally pays off debts over a period of five years (those holding nonpriority unsecured debts don’t come out much better than they would in a Chapter 7 filing).

Here’s the point – nonpriority unsecured debts such as credit cards and medical bills can be discharged, whereas priority unsecured debts cannot. In fact, 11 U.S.C. §523 contains a laundry list of debts that cannot be discharged – taxes, credit obtained through fraud, debts for luxury items purchased immediately prior to the bankruptcy filing, domestic support obligations, criminal fines and fees, etc.

In the case of my former client, the criminal fines were lumped in with the rest of the nonpriority unsecured debts and they never got paid. The court left him alone until he finished paying on his Chapter 13 plan and was discharged from his responsibility to pay his debts.

That discharge, however, was worthless when it came to the criminal fines. The warrant that was issued was proof positive that his lawyer messed up, but pointing fingers and assigning blame doesn’t matter a whole lot when someone is facing the prospect of being tossed in jail.

The point? Bankruptcy won’t take care of all debts someone happens to owe. There are some very clear guidelines as to what can and cannot be discharged. An attorney I worked with in the 1990s once told me that bankruptcy was a malpractice trap for lawyers. He was right.

Ethan C. Nobles is an attorney in Benton focusing on real estate, evictions, contracts, wills, trusts, incorporations, bankruptcy and other areas of law as the mood strikes. You can reach him at Ethan@NoblesLawFirm.com or visit him on the Internet at NoblesLawFirm.com.