Are fines or punitive damages for fraud discharged in bankruptcy?

Get Legal Help Today

secured lock Secured with SHA-256 Encryption

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Jul 16, 2021

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

If you are found liable for fraud, you may end up facing fines (statutory penalties) as well as punitive damages. If you cannot pay those damages, you may wish to try to discharge them in bankruptcy. This is not an option, however, since the bankruptcy code will not permit you to discharge any penalties for fraud.

What Cannot Be Discharged Under Bankruptcy Fraud Rules

Under federal bankruptcy rules, you may not discharge:

  • The actual value of the “money, property, services, or . . . credit” obtained through fraud, nor 
  • The punitive damages and attorneys fees related to the fraud. 

Get Legal Help Today

Find the right lawyer for your legal issue.

secured lock Secured with SHA-256 Encryption

The Rules for Fraud in Bankruptcy

The rules for discharging fraud penalties in bankruptcy were made clear in a March 25, 1998 decision of the Supreme Court of the United States in Cohen v. de la Cruz

The case involved a landlord who had overcharged his tenants. The trial court found that the landlord had committed “actual fraud” within the meaning of the Bankruptcy Act and that his conduct amounted to an “unconscionable commercial practice” under New Jersey’s Consumer Fraud Act. As a result, the court awarded the tenants treble damages plus reasonable attorney’s fees and costs.

The debtor recognized the approximately $30,000 in improperly charged rent would not be dischargeable, but argued that he should not be stuck having to pay the $100,000 in punitive damages and attorneys’ fees the court awarded. The court decided those extra damages had been awarded as a result of his fraudulent acquisition of “money, property, services, or . . . credit.” All the debtor’s obligations arising out of fraudulent conduct, including both punitive and compensatory damages, were not eligible for discharge in bankruptcy.

Getting Help

While bankruptcy can provide you with a viable option for restructuring and eliminating most debts, not all debts can be handled through a bankruptcy filing. Before filing for bankruptcy, you will want to speak to a lawyer to ensure that the bankruptcy will help you to resolve the particular financial problems you face. 

Get Legal Help Today

Find the right lawyer for your legal issue.

secured lock Secured with SHA-256 Encryption