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Unsecured debts are dischargeable in bankruptcy. This applies to credit card debt, medical debt, personal loan repayment obligations, back rent, commercial late fees and penalties, deficiency balances owed after a home foreclosure or vehicle repossession, and any number of other sorts of debt that are not “secured” with collateral. Criminal fines or penalties are never dischargeable in bankruptcy.
Nearly all debts are dischargeable in Chapter 7 or Chapter 13 bankruptcy. Every sort of consumer debt or contract-based obligation or liability arising from a contract or lease can be avoided with a bankruptcy filing. Even a money judgment awarded against you can, in most cases, be discharged in bankruptcy. However, not every debt is dischargeable in bankruptcy. And, in particular, not every court judgment is dischargeable in bankruptcy. This article discusses a few of the different types of judgments that are excepted from a Chapter 7 or Chapter 13 bankruptcy discharge.
First, what is dischargeable?
Unsecured Debts Dischargeable in Bankruptcy Generally
The default rule is that unsecured debts are dischargeable in bankruptcy.
This applies to credit card debt, medical debt, personal loan repayment obligations, back rent, commercial late fees and penalties, deficiency balances owed after a home foreclosure or vehicle repossession, and any number of other sorts of debt that are not “secured” with collateral. It also applies, in most cases, to civil court judgments. A civil judgment is one which does not result from a criminal charge. (Criminal penalties—including parking tickets, contrary to what some Detroit-area bankruptcy lawyers claim—are never dischargeable in bankruptcy.) Thus, a criminal conviction or a penalty or fine arising from a criminal conviction cannot be discharged in bankruptcy. In the civil judgment spectrum, also not dischargeable are judgments awarding what is called injunctive relief.
An injunction is a court order to either perform an action or to refrain from performing an action. An example of an injunction would be a court order requiring you to tear down a fence that you built on your neighbor’s side of the property line. Such an order is not dischargeable in bankruptcy because it is not a money judgment. Bankruptcy discharges financial liability. It makes debt go away. That is all that it does. Thus, a court judgment must be a money judgment to be swept into the pool of debts affected by a bankruptcy discharge.
All of that said, it is therefore the case that, by default, court-ordered, civil money judgments are dischargeable in bankruptcy, just as easily as is a credit card balance or doctor’s bill.
Bankruptcy Discharge of Court Judgments: A Matter of Federal Law
Before proceeding, it also worth noting that all of these judgments under discussion are judgments awarded by Michigan or other state courts.
Bankruptcy is a Federal legal process. It preempts (or takes priority over) any state court judgment which attempts to sidestep its discharge. Thus, for example, a court order issued by the district court in Livonia that states that a plaintiff in a civil case is awarded a money judgment and that the award is not to be discharged in bankruptcy would be legally null.
It would, however, surely result in a misguided creditor and some further court appearances to obtain a bankruptcy court judgment affirming the debt’s dischargeability and perhaps an appearance back in the Livonia district court to “educate” the judge that authored that judgment. (Generally speaking, Michigan state court judges know better than to do this—but such incidents have occurred. ) That being so, a state court judgment that is not dischargeable in bankruptcy is not dischargeable only when and if the US Bankruptcy Code lists that type of debt as being non-dischargeable. It is never non-dischargeable because a state court judge claims that it is.
So what types of court judgments does the US Bankruptcy Code except from a Chapter 7 or Chapter 13 discharge?
Types of Court Judgments Not Dischargeable in Bankruptcy
The types of court judgments and their underlying debts that are not dischargeable in Chapter 7 or Chapter 13 bankruptcy are enumerated in Section 523(a) of the US Bankruptcy Code.
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Willful and Malicious Torts
A tort is a civil injury—as opposed to criminal injuries that land you in jail. A tort is the basis for a civil lawsuit claiming damages. Actions such as trespass, assault, battery, false imprisonment, and others are torts (some can be criminally charged as well). A money judgment awarded because you willfully and maliciously (on purpose and with intent to harm or cause damage) is not dischargeable in bankruptcy.
Consider the example of the woman some time back who purposefully drove her SUV into a crowd of people, injuring many of them. Criminal charges are certainly likely in such a case, but just as likely are lawsuits filed against the woman, the owner of the car, and the auto insurance company underwriting the car’s insurance policy. A judgment against the driver, certainly, would not be dischargeable in bankruptcy.
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Drunk/Drugged Driving Damages Awards
Another sub-section of Section 523(a) provides that awards for damages based upon personal injuries occurring because the debtor was intoxicated from the use of alcohol, a drug, or another substance are excepted from discharge.
Note that the statute requires that the debtor have been the intoxicated party for the discharge exception to apply. If you are sued because you let your boyfriend use your car, and then he gets drunk and causes injury while driving it, you will have a defense to the claim that the judgment is non-dischargeable.
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Federal Criminal Orders of Restitution
An order requiring restitution attendant to criminal convictions under Title 18 of the US Code (i.e., Federal criminal law) is likewise not dischargeable in bankruptcy.
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Civil Contempt of Court
Civil contempt of court judgments are non-dischargeable to the extent that the judgment requires that the damages are paid to the court or to or for the benefit of a governmental entity.
If, in the course of a contractual dispute with a private party, you act egregiously and the court awards the other party a monetary contempt judgment against you, requiring that you pay money to the other party—this is dischargeable in bankruptcy. At least one Eastern District of Michigan Bankruptcy Court judge, now retired, was foggy on this point, despite its affirmation by the Sixth Circuit Court of Appeals. Be prepared to litigate any contempt judgment before the Bankruptcy Court if you are shouldering such a liability.
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Child or Spousal Support Awards
An award of child or spousal support by a state court adjudicating a divorce or other such family law dispute is not dischargeable in either Chapter 7 or Chapter 13 bankruptcy. Property settlement awards arising from a divorce judgment are dischargeable in Chapter 13 bankruptcy, however.
This should never be presumed, however, and always discussed with an experienced Michigan bankruptcy attorney prior to filing your case. Clever divorce lawyers will, from time to time, succeed in having property divisions characterized as support in a divorce judgment.
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Taxes and Tax Penalties
Judgments arising from income, sales, excise, and other business tax debts owed to the IRS, to the Michigan Department of Treasury, the City of Detroit or any other municipal taxing authority are only dischargeable in bankruptcy under limited circumstances.
A highly experienced bankruptcy attorney should be consulted and retained for the filing of any bankruptcy proceeding involving significant tax debt.
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Student Loan Judgments
Student loans and judgments premised upon student loan debts are not dischargeable in bankruptcy unless you and your Michigan bankruptcy lawyer successfully prosecute an action known as an Adversary Proceeding within your bankruptcy case that results in a judgment (of the Bankruptcy Court judge assigned to your case) that the debt is, in fact, dischargeable. Otherwise, student loans in Michigan, as of this writing, are by default subject to the fiat of Section 523(a) that student loans are not dischargeable except in cases of “undue hardship.”
In Michigan, we are governed by the Sixth Circuit Court of Appeal’s unwavering adherence to an antique standard known as the “Brunner Test,” which essentially requires that you not only be disabled for life to be experiencing “undue hardship” but that you also have maintained a stellar student loan payment history prior to filing bankruptcy and that you have exhausted all possible non-bankruptcy alternatives.
Only Congress or the US Supreme Court will make student loan debt more dischargeable in Michigan than that.
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Fraud
Last but not least, judgments arising from a variety of different shades of fraud are not dischargeable.
Section 523(a) defines fraud in a number of different ways. For example, a common commercial debt, say the obligation to repay a loan from a bank, would normally be entirely dischargeable in bankruptcy. However, if you obtained the loan by lying on your loan application about your income or other ability to repay or by forging a co-signor’s signature, the bank might successfully obtain a judgment from Michigan state court as a result of a complaint containing a count of fraud.
This debt would not be dischargeable in bankruptcy.
As an example of another form of fraud enumerated in 523(a), if you have a judgment against you for defalcation, this will also not be dischargeable in bankruptcy. Defalcation occurs when you are a general or sub-contractor who accepts money from a customer for a construction job that is to be used to pay for materials and sub-contractors (or sub-sub-contractors) and then do something other than that with the money.
There are other examples in 523(a) as well.
Court Judgments in Bankruptcy: The Bottom Line
The bottom line with regard to court judgments in bankruptcy is that you, as layperson, will often have no idea whether or not the judgment you hold in your hand is redressable through the bankruptcy process or not.
An experienced Metro Detroit bankruptcy lawyer should always be consulted. Even if, having read this article, you are convinced that your judgment is actually dischargeable, third parties and legal adversaries are never guaranteed to be in agreement with such an opinion.
An attorney will be able to advise you not only of the legality of your judgment’s discharge—but also the potential for litigation that it represents and the potentially sizeable attorney’s fees and court costs and expenses that that represents.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert and has represented thousands of Chapter 7 and Chapter 13 clients in Michigan bankruptcy matters for over 30 years.
If you are considering filing for bankruptcy but are not sure whether or not you can discharge a judgment already awarded against you, contact us to schedule your free, initial consultation.
