Bankruptcy Is Not Absolute

May 11, 2012

The bankruptcy discharge is one of the most broad and powerful provisions in U.S. law. Discharged debts cannot ever be collected from the debtor. However, there are limits to the bankruptcy discharge and it is only meant to help honest debtors. The federal bankruptcy code excepts certain "bad actor" debts from discharge, like criminal fines, debts from willful and malicious conduct, debts from drunk driving, etc.

The case of Nicolai v. Larsen, decided recently by the 7th circuit Court of Appeals, is an excellent example of how the bankruptcy code may limit the discharge when the debtor is dishonest. In this case Larsen was awarded $3.4 million by a Wisconsin court as a result of injuries Nicolai caused while attempting to murder his wife. Nicolai tried to discharge this debt during bankruptcy. The 7th Circuit Court of Appeals found that the debt was based on Nicolai’s bad acts of battery, false imprisonment and intentional infliction of emotional distress. Under section 523(a)(6)of the bankruptcy code, debts arising from “willful and malicious injury by the debtor to another entity or to the property of another entity” are not dischargeable, the 7th Circuit denied Nicolai his request to discharge the $3.4 million debt. The court said:

"We imagine that all courts would agree that a willful and malicious injury, precluding discharge in bankruptcy of the debt created by the injury, is one that the injurer inflicted knowing he had no legal justification and either desiring to inflict the injury or knowing it was highly likely to result from his act. To allow him to shirk liability by discharging his judgment debt in those circumstances would undermine the deterrent efficacy of tort law without serving any policy that might be thought to inform bankruptcy law property of another entity.”

The bankruptcy code does not automatically except a debt for "willful and malicious injury" from the order of discharge. Instead, a creditor has a duty to affirmatively object to the discharge of the debt. If the creditor fails to file a timely objection, the debt is included in the discharge and the creditor may not collect from the debtor.

If you have caused a willful injury to another person and need financial help, speak with an experienced bankruptcy attorney. Your attorney can explain your legal rights and discuss your bankruptcy options. The bankruptcy code is flexible to permit repayment, discharge, or time to restructure your finances.

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