Chapter 7 Bankruptcy and Denial of Discharge for Willful or Malicious Injury

One of the limitations on receiving a discharge in a Chapter 7 bankruptcy is that the debtor cannot discharge any debt for willful or malicious injury.

Section 523(a)(6) of the Bankruptcy Code precludes the discharge of a debt “for willful and malicious injury.” As noted by the United States Supreme Court in Kawaahua v. Geiger, 523 U.S. 57, 61 (1998), the “word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” For the same reason, nondischargeability under this section will attach only to injuries that are malicious. In the Second Circuit, the Court of Appeals set the standard for “willful and malicious injury” in its decision in Navistar Financial Corp. v. Stelluti (In re Stelluti), 94 F.3d 84 (1996). The Court concluded that “[t]he term ‘willful’ in this context means ‘deliberate or intentional,’” and that “[t]he term ‘malicious’ means wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Id. at 87 (citations omitted).

In a recent case, In re Alessi, Judge Bucki held that the deliberate failure to abide by the terms of the contract, amounted to willful and malicious injury. In Alessi, the debtor, Mrs. Alessi,  not only failed to pay a debt, but a failure to pay from funds that the debtor had agreed specifically to earmark for that purpose. The uncontroverted facts showed that the funds resulting from a real estate transaction were accessible and not otherwise encumbered, that the debtor knew of her obligation to turnover the funds, and that through his counsel, Mr. Alessi made timely demand for payment, even though not obligated to do so. The resulting injury was willful, in that Ms. Alessi deliberately and intentionally refused to turn over the sale proceeds. By violating a contractual provision for use of committed funds, Amy Alessi inflicted a wrongful financial loss without just cause or excuse. Hence, she caused an injury that was malicious within the meaning of section 523(a)(6).

Thus, if you are a debtor, you may have an obligation to follow through on the contracts where the funds are specifically designated for a given purpose.  If you fail to do so, you may be denied a discharge.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Workers Compensation and Chapter 7 Bankruptcy

If you file a Chapter 7 bankruptcy, what happens if you have a pending workers’ compensation claim?  Generally, if you file for bankruptcy in New York, any money received as certain public benefits is usually exempt.  However, workers’ compensation claims can result in significant lump-sum awards and a bankruptcy trustee may file an objection to the debtor claiming such award as exempt.

Here in Rochester, Judge Ninfo dealt with a similar situation in In re Herald, and his decision resolved these issues in Western New York. In order to resolve this issue in favor of the debtor, Judge Ninfo had to find that worker’s compensation award fell within the scope of §282.2(c) of New York’s Debtor Creditor Law, which exempts benefits received as a result of “disability, illness or unemployment benefit.”

After analyzing the legislative history of §282 of New York’s Debtor Creditor Law, Judge Ninfo concluded that the legislative intent was to exempt workers’ compensation proceeds.  He further noted that in some situations this may give a debtor a head start, as opposed to a fresh start,  where the debtor will receive a significant award after the bankruptcy filing, but found that any such award to be exempt nonetheless.

Thus, if you have a workers’ compensation case pending or your are receiving worker’s compensation payments, you can file a Chapter 7 bankruptcy and keep the award when you receive it.  It is important to tell your bankruptcy lawyer about it in advance, so that the workers’ compensation claim is listed as exempt on your bankruptcy petition.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Chapter 7 Bankruptcy and Objections to Discharge

You have filed a Chapter 7 bankruptcy.  You and your lawyer went to the meeting of the creditors.  Everything seemed to be in order.  Then your lawyer calls you, and tells you that one of your creditors has filed an adversary proceeding in your Chapter 7 case, objecting to discharge of its debt.  So what exactly is taking place?

If a creditor determines that an objection with respect to discharge of its debt is warranted, the creditor will file an Objection to Discharge of its particular debt.  This filing begins what is known as an adversarial proceeding in the bankruptcy court.  An adversarial proceeding is simply a law suit within the bankruptcy, seeking to declare a particular debt as non-dischargeable.  The debtor responds to the complaint, evidence is gathered and supplied to both sides, and a hearing is held in front of the bankruptcy judge who decides the case.  Here in Rochester, Hon. John C. Ninfo, II, would hear the case.  Typically, neither the bankruptcy trustee nor the U.S. Trustee are involved in the adversarial proceeding.

A creditor may object to the discharge of its debt in a number of different situations.  An unsecured creditor may object using Section 523(a)(2) of the Bankruptcy Code, which contains several different types of non-dischargeable debt.  The debt under that section may not be dischargeable because it is: (1) $500 owing to a single creditor for the purchase of “luxury” goods within 90 days prior to filing of the bankruptcy; (2) $750 owing to a single creditor for a cash advance (i.e. balance transfers are cash advances) obtained within 70 days prior to filing of the bankruptcy; or (3) for money obtained under false pretenses, false representation, or actual fraud.  There are also additional reasons to declare a debt non-dischargeable.

With respect to situations (1) and (2), the applicable rules are known as  as the per-se rules.  That means that the creditor need not prove debtor’s intent (i.e. fraud), and needs to show only that the transactions meet the criteria stated.  Situation (3) means that the debtor made the charges/cash advances knowing that he/she was going to file bankruptcy, or made the charges/cash advances while insolvent and/or could not have had a reasonable expectation to pay back the debt, or made false representations in obtaining credit resulting in the debt he/she is trying to discharge at this time.

If the creditor is successful in having a debt declared non-dischargeable, the debtor will owe that debt until it is paid, with all accumulating interest,  and the debtor can never discharge that debt.

The following is a brief description of procedural issues applicable to the objections.  The complaint must be filed on or before 60 days from the first date set for the creditors meeting (also know as 341 meeting).  Typically, a creditor has less than 90 days after receiving notice of the bankruptcy case to file a complaint.  A creditor must act promptly to determine there are grounds to object to discharge.

Even if a creditor files an objection to discharge of its debt, the rest of the bankruptcy will proceed normally.  The debtor will recieve the discharge on time, and most of the time, the discharge will be received before the hearing in the adversarial proceeding.

Once the adversarial proceeding is filed, the debtor has a number of options with respect to the creditor’s claim.  The debtor can agree to repay all or a portion of the debt by signing a reaffirmation agreement.  A typical reaffirmation agreement results in the debtor paying 50% of the debt over 12-18 months.  The next option is fighting the objection.  The debtor will have to be able to either fight the objection on his/her own or pay an additional retainer to the attorney to fight the claim.

The way that a creditor proves its case, is by showing to the court that the debtor was in financial distress at the time the objectionable transactions were made.  Therefore, the debtor’s financial history will be disclosed through the discovery process, usually for a period of 12 months prior to the challenged transaction, and from the date of the transaction to the date of filing.  Since an adversarial proceeding is a civil matter, both parties may call witnesses, and the debtor may be called to testify by either side.  A creditor’s theory of the case in an adversarial proceeding is usually that no reasonable person could have expected to be able to pay off the debt, at the time that debt was taken out.

If the creditor wins, a judgment is entered, declaring the debt non-dischargable.  This judgment can ultimately be used in New York State court, or elsewhere, to obtain a  money judgment that can then be used to garnish wages, restrain bank accounts or conduct other collection activities.  That judgment will not be dischargeable in any subsequent bankrupcies and can only be extinguished by payment or by New York’s statute of limitations, presently 20 years.  Even if the creditor prevails, the debtor is not responsible for the creditor’s attorney’s fees and costs.

If the debtor wins, the debt is discharged, and, under appropriate circumstances, the creditor will have to pay debtor’s attorney’s fees and costs.

Thus, if an adversarial proceeding is brought, the debtor must choose between either settling or fighting.  The cost to defend an adversarial proceding is usually substantial.  Therefore, it should be compared to the cost of settling the case.  If the proposed settlement reduces the debt and the payments are affordable, especially if the settlement amount is less than the cost to defend, the debtor should consider settlement.

If you are dealing with debt problems in Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation.