Some kinds of debts survive bankruptcy depending on the post filing actions of the creditor itself. The debtor doesn’t know how it plays out until 60 days after the 341 meeting.
Those three exceptions to discharge look not at the kind of debt involved, such as taxes, or support or student loans. Rather these exceptions look at how the debt arose.
Bankruptcy is supposed to help the honest but unfortunate person. These exceptions can prevent bad actors from escaping the consequences of those actions in bankruptcy.
There’s another, significant difference: a creditor who holds one of these claims has to act, promptly, to except his claim from discharge. No challenge to a debt, the debt is discharged.
The creditor has to file a timely challenge to the discharge of its debt. That’s what the 60 day period between the 341 meeting and the discharge is all about.
A creditor who files a challenge must then carry the burden of proof at trial. The debtor gets a presumption that the debt is dischargeable.
So, what kind of bad behavior may keep a debt from being discharged?
Fraud is non-dischargeable
Debts that are created as a result of proven fraud, misrepresentation or false pretenses aren’t subject to being wiped out. That’s §523(a)(2).
Note that the exception looks at the transaction at its begining. The statute focuses on money, property, services to the extent obtained by fraud.
While the debtor may have behaved badly after a debt was created, that bad behavior doesn’t exclude the debt from discharge.
There’s another wrinkle. If the alleged false statement is one about the debtor’s financial condition, that statement must be in writing to preclude discharge.
If a creditor proves fraud, the claim becomes a debt that suvives bankruptcy.
Breach of fiduciary duty survives
The second clutch of bad behaviors that can’t be discharged involve breach of fiduciary duty, embezzlement and larceny. §523(a)(4).
Embezzlement and larceny, which is a kind of theft, are easy to understand. But not so, fiduciary duty. Bankruptcy law has a narrow definition of who is a fiduciary.
For breach of fiduciary duty to be nondischargeable, the duty must arise under an express trust. So trusts that are created by law to further equity or prevent undue enrichment don’t fall under this subsection.
One of the first judges I practiced before used to say that under California law, everyone is a fiduciary for everyone else. But not necessarily in his federal court.
So breach of fiduciary duty or theft, if proven, joins the debts that survive bankruptcy.
Willful and malicious injury gets no discharge
Debts grounded in intentional injury to person or property live on after bankruptcy. Section 523(a)(6)makes non dischargeable debts for willful and malicious injury by the debtor to another entity or to the property of another entity;
There’s a huge body of law tussling with the meaning of “willful” and “malicious”. And the plot thickens when you realize that some of the statutory protections for creditors created by this subsection are greater in Chapter 13 than in Chapter 7.
In Chapter 13 a debt for damages for personal injury is non dischargeable if it results from either willfulness or malice! But damage property willfully or maliciously and the debt is dischargeable.
Timing is everything
There’s a timing issue for both creditors and debtors in these three discharge exception cases.
Debtors facing state court litigation may want to file bankruptcy before trial of the matter. Findings of fact made in a state court trial will be entitled to finality in a bankruptcy trial.
So, suffer an adverse finding in state court and you’re stuck with that finding in bankruptcy.
But since the standards of what is fraud or false representations is slightly different in federal law than in state law, you may have a dispute about whether the finding is really on the same issue that the bankruptcy court is focused on.
It may be cheaper to try the issue once, in bankruptcy court, than risk having to defend yourself twice in state court, then bankruptcy court.
Creditors must be diligent once a bankruptcy case is filed, to meet the filing deadline for challenging the discharge of their debt. Generally, the bankruptcy court sets a deadline 60 days after the date set for the first meeting of creditors by which challenges to dischargeability must be filed.
Miss that deadline for one of these kinds of debts and as a creditor you’re out of luck. The debt will be discharged regardless of the merits of the challenge you could have brought to exclude it from discharge.
More
Denial of discharge is different
How bankruptcy treats debts to the government
What happens to judgment liens in bankruptcy
Does a bankruptcy discharge last forever?
