Are Debts Owed in a Personal Injury Settlement Dischargeable in a Bankruptcy?
As the term “personal injury” is open-ended, let’s look at the Bankruptcy Code to explore a particular type of debt that potentially is not dischargeable: A debt that is the result of doing willful and malicious harm to a person. If the creditor can show that the debt was incurred as the result of willful and malicious harm, then the Court will determine that debt is not dischargeable.
You’ll notice I said the creditor has to show this. The creditor has a choice to make regarding whether or not to challenge the discharge of this type of debt. If the creditor fails to challenge, or loses the challenge, the debt will be discharged. This is in contradistinction to something like a nondischargeable tax debt. The IRS isn’t going to mount an action in the bankruptcy court to determine nondischargeability because the statute is clear. However, a willful and malicious harm debt is very fact-specific.
Approximately a month after a debtor files a bankruptcy petition, a meeting of creditors under Section 341(a) of the Bankruptcy Code takes place. A creditor has 60 days after the date first set for the meeting of creditors to initiate an adversary proceeding to challenge the discharge of the debt under a theory of willful and malicious harm. However, the simple filing the adversary complaint is not enough. The creditor must prove that the injury was the result of both willful and malicious harm.
There is a horrific U.S. Supreme Court Case, Kawaauhau v. Geiger, 523 U.S. 57 (1998), in which a doctor was guilty of gross medical malpractice, and as a result, his patient lost her leg. She got a judgment against him, and he filed a Chapter 7 bankruptcy. The case ultimately went up to the Supreme Court because the patient challenged the discharge of the debt. Ruth Bader Ginsburg was the justice who authored the decision. The unanimous Court held that although the doctor’s malpractice was egregious, and held, “We hold that debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Thus, the malpractice debt was dischargeable in the bankruptcy.
In conclusion, if the creditor can’t show willful and malicious harm, then it is a dischargeable debt, no matter how bad the harm was. Even though the doctor caused the loss of a limb, he was able to discharge the debt.
Are Fines and Penalties to Governmental Units Dischargeable in a Bankruptcy?
Under section 523(a)(7) of the Bankruptcy Code, fines and penalties to the government are not dischargeable in a Chapter 7 or Chapter 11 bankruptcy, unless the penalty is to compensate the governmental unit for pecuniary loss. In Chapter 13, however, you can get rid of fines unless they were incurred in a criminal context (in other words, a fine to punish somebody for criminal activity). You could, for example, get rid of a parking ticket fine in a Chapter 13. You’d still have to pay some of the debt through the plan, but at plan completion the unpaid portion would be discharged.
My cynicism shows here: I’ve seen that the government takes care of its own. Congress wants to make sure that, if you owe the government, you pay the government. That’s why fines and penalties are generally not dischargeable, except for the one Chapter 13 exception. However, Congress is not entirely without a heart. The Code does permit the discharge of certain tax debts, although most tax debts are not dischargeable. Thus, my cynicism does have to be softened a little with the understanding that what Congress does in a draconian frame of mind in one place, it sometimes softens in another.
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