Posts

Debts from a Criminal Conviction Can’t Be Written Off in Bankruptcy, But a Bankruptcy Can Still Help

Three ways bankruptcy can help: 1) write off debts to focus on defense costs, 2) pay only the most important debts and expenses, and 3) reduce chance of related civil liability.

 

As discussed in the last blog, criminal fines, fees and restitution are almost never discharged in any kind of bankruptcy case. And yet if you’re facing a serious criminal charge, or have already been convicted, bankruptcy can still be hugely helpful.

If you’re charged with a crime, you need financial resources to pay for your legal defense. You need to be able to focus financially and emotionally on fighting the criminal charge. And then, if you do not win a complete acquittal, you have to figure out how you will pay whatever criminal fines, restitution, or other court and probation fees that the court orders as part of your criminal sentence. So you have to choose what your highest financial priorities are. Because of the grave potential consequences, that usually means paying for a defense attorney, and then paying whatever the criminal court requires of you.   Bankruptcy can help in this by re-prioritizing your debts and expenses, and protecting you from your creditors.

1. Bankruptcy can help by writing off all or most of your debts so that you can focus both your attention and your finances on the criminal charge(s) or their aftermath.

Right after you’ve been charged with a crime, unless you indigent and financially qualify for a public defender, your highest priority must be to pay for your criminal attorney and any related costs of your defense. That may mean selling assets, and/or surrendering collateral to creditors, like a vehicle with high monthly payments. And you may need to stop paying all your creditors.  Often the cleanest way to reduce your debt load is with a Chapter 7 bankruptcy. In the right circumstances it provides the financial relief you need.

After your criminal case is resolved, especially if you had to serve a jail sentence, you’ve probably had a gap in your income, or now have a job with lower income. You often have continuing financial obligations to the criminal justice system that you must absolutely pay because your release or probation is conditioned on you doing so. These can include restitution payments, probation/supervision fees, treatment costs, community service fees, and/or chemical and electronic monitoring charges. A bankruptcy can clean up your debts so you can pay these criminal fees and avoid re-incarceration. The last thing you need is some ancient creditor garnishing your wages or bank account so that you can’t meet your criminal obligations.

2. Bankruptcy can help you prioritize your debts and expenses so that you can keep paying the ones most important to the criminal conviction against you.

Sometimes the criminal court imposes other kinds of conditions on you which directly require you to keep current on certain of your debts or expenses, beyond the court and probation fees referred to above. Depending on the nature of your offense, you may be required to keep absolutely current on your child support payments, or file and pay income taxes on time, or always maintain vehicle insurance. A bankruptcy can make all the difference allowing you to fulfill such make-or-break commitments.

Also, your criminal sentence or terms of probation often require you to show up at certain scheduled events—to do your community service, attend probation meetings, or just maintain regular employment. All require reliable transportation. If you cannot make your vehicle payments or pay for vehicle insurance, or at least pay for public transportation, you will not be able to meet these conditions. A Chapter 7 or Chapter 13 bankruptcy may be the best way for you to be able to pay for these necessities.

3. Alleged criminal behavior often results in the threat of civil liability by the injured party. Filing bankruptcy might, under certain circumstances, dissuade that party from filing a lawsuit against you, or lead to a quicker settlement if a lawsuit has already been filed.

Bankruptcy law does make it difficult for you to discharge debts or claims that you may owe for personal injuries or financial damages resulting from certain kinds of allegedly criminal behavior. But, nevertheless, for the following practical reasons a bankruptcy may still help:

a. In a bankruptcy, you must present your financial circumstances in detail, in writing, under penalty of perjury. You are also questioned under oath about them, at least briefly, and potentially in depth. Although that may not sound like a lot of fun, taking the initiative to show that you have no assets may convince the other party—or may more importantly, his or her attorney—that pursuing you would not be financially worthwhile.

b. The other party has to jump through some relatively difficult hoops to establish that the debt or claim should survive beyond your bankruptcy case. Depending on the situation, this may dissuade him or her from spending lots of attorney fees on a difficult battle.  

c. With certain kinds of alleged damages, the other party has a very short amount of time to decide whether to pursue you or not. Some may simply miss the quick deadline. Or it may encourage a quicker settlement.

Whether a bankruptcy filing will give you an advantage along these lines is a very delicate tactical question that needs to be very carefully discussed with and analyzed by your attorney. But it is certainly worth considering.

/by

Criminal Fines, Fees and Restitution Are Never Discharged in Bankruptcy, Right?

Obligations you owe related to your conviction of a crime cannot be discharged in bankruptcy. End of story? Usually, but not absolutely.


Many of the categories of debt that are generally not discharged (legally cancelled) in bankruptcy leave some wriggle room.  So, income taxes can be discharged under certain conditions. Some student loans can as well. Certain other categories of debts involving alleged fraud or other inappropriate behavior by the debtor are still completely discharged if the creditor simply fails to file an objection to the discharge in time with the bankruptcy court.

But with criminal fines, fees, or restitution it’s pretty clear-cut—NO discharge.

If you’ve heard otherwise you might actually be hearing correctly—especially about restitution—but most likely you’re reading or listening to information that’s now a couple decades outdated. For a long time criminal fines and restitution have not been able to be discharged under Chapter 7, BUT until the early 1990s criminal restitution COULD be discharged under Chapter 13. In fact a 1990 United States Supreme Court opinion, Pennsylvania Dept. of Public Welfare v. Davenport, clearly stated that criminal restitution was dischargeable under Chapter 13, based on the language that Congress had used in the Bankruptcy Code. However, in direct reaction to that Supreme Court opinion, Congress quickly amended Chapter 13 to make clear that criminal restitution could not be discharged. A few years later Congress tightened up the law again, this time to say that criminal fines could not be discharged under Chapter 13 either. So ever since then the law about this has been quite clear.

But still, complications can arise.

Take the situation where the same conduct by a debtor can result in either civil or criminal liability, or both. Examples are an alleged embezzlement, personal injury caused in a bar fight, or even an alleged murder/wrongful death. Everybody’s favorite example of the last one—O.J. Simpson. Remember he was acquitted of murder. on the criminal side, but then was held liable for wrongful death in the civil lawsuit against him. In most cases it’s clear as day whether a case against a person and the liability that results from it is civil or criminal. And so it’s usually clear whether or not the debt is subject to bankruptcy discharge (though in these three examples the debt may still not be dischargeable for other reasons).

But every once in a while, whether an obligation is a criminal fine or instead a civil penalty might not be so clear.  If you own an auto repair shop and the state water quality agency fines you for illegal disposal of waste fluids, that obligation may be a criminal or civil one.

Or in some rare cases under Chapter 13, even some obligations arising directly from a criminal court’s judgment might be considered not to be “restitution, or a criminal fine,” and so can be discharged. That’s because even though Congress tried to “fix” the problem tossed in its lap by the Supreme Court’s Davenport opinion referred to above, it did not use language as broad as it had used under Chapter 7 to make clear that all criminal-related debts aren’t dischargeable. So some very limited kinds of criminal court-based obligations might still be discharged in a Chapter 13 case.  

Here is real life illustration of this—although I must warn that this may or may not be the way our local bankruptcy courts would interpret the law. The case is worth mentioning to show how courts wrestle with—and can disagree about—these kinds of issues.

A guy named Joseph Elliott Ryan was convicted in Alaska of the federal crime of possession of an unregistered firearm. He did nearly 5 years of prison time and paid a $7,500 criminal fine. But his criminal conviction also included obligations to pay $750,000 in restitution and $83,420 for “costs of prosecution.” On appeal, this huge restitution obligation was overturned and eliminated. He then filed a Chapter 13 case in Idaho and included his remaining obligation for the “costs of prosecution.” When his Chapter 13 case was completed, he had paid less than $3,000 of that $83,420 obligation. But he asked the bankruptcy court to order that the remaining $80,000 or so be discharged. The court refused, saying that “costs of prosecution” are a “criminal fine” excluded from discharge under Chapter 13.

But the bankruptcy court was overturned on appeal, and so that $80,000 “costs of prosecution” obligation was discharged.  As described in more detail in this article, the appellate court carefully analyzed the meaning of the term “criminal fine” as used in this context and elsewhere, and concluded that this term does not include “costs of prosecution.” It did not matter to the the appeals court that the “costs of prosecution” had been part of a criminal court’s criminal sentence.  So Mr. Ryan did not have to pay any more or that criminal court obligation, and was completely debt-free.

To be clear, just about all criminal fines, fees, and restitution CANNOT be discharged under either Chapter 7 or 13. But as Mr. Ryan’s unusual case illustrates, there can still be limited exceptions. In his case, for less than 5 cents on the dollar, and as a result of some smart lawyering, he got a bankruptcy discharge of a criminal court obligation.

/by