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The dischargeability of debts in bankruptcy

On Behalf of | May 23, 2019 | Personal Bankruptcy |

When a debtor in California files for bankruptcy, they generally assume that all their debts will be discharged or forgiven. However, this isn’t true in all cases. A North Carolina court has provided some guidance for creditors seeking exemptions for instances when debtors aren’t entirely honest.

The case that led to the court’s ruling concerning the extent of bankruptcy protection involves allegations that the executrix of an estate mismanaged it. The jury sided with the children who inherited from the estate and ordered the former executrix to cover compensatory and punitive damages. She then filed for Chapter 7 bankruptcy after the trial. A lawsuit inside of the bankruptcy case was filed to have the jury award declared non-dischargeable. The court determined that state-court punitive damages awards are not automatically non-dischargeable in bankruptcy. But claims against the executrix by the estate were dismissed, so the judgment was ultimately discharged.

There are some established exceptions for discharging debt. For instance, debts obtained or accumulated by fraud, misrepresentation or false pretenses may be considered non-dischargeable. Even if fraud or misrepresentation isn’t part of the equation, some debts may still be declared nondischargeable. Failing to produce funds entrusted to a fiduciary (defalcation) and willful and malicious acts that contributed to property damage or injuries that resulted in debt are some of these possible exceptions. However, there must still be proof of intentional wrongdoing on the part of the individual declaring bankruptcy because of debt related to their alleged fraudulent or negligence actions.

“Bad conduct” by a debtor doesn’t automatically mean debt will be non-dischargeable. Any decisions in regard to the discharge of debt are ultimately made at the discretion of the bankruptcy court. The role of a personal bankruptcy lawyer is to help a client with legitimate debts find an acceptable way to either make new payment arrangements or have certain debts discharged entirely.