Are fines or punitive damages for fraud discharged in bankruptcy?

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.

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.

Case Studies: Are fines or punitive damages for fraud discharged in bankruptcy?

Case Study 1: Unpaid Fraud Penalties

Sarah, a business owner, is found liable for fraud and is ordered to pay substantial fines and punitive damages. Unable to afford the payments, she considers filing for bankruptcy to discharge the debts. However, she discovers that under federal bankruptcy rules, penalties for fraud cannot be discharged. Sarah seeks legal advice to explore alternative options for resolving her financial obligations.

Case Study 2: Fraudulent Commercial Practice

Michael, a real estate developer, engages in fraudulent practices that result in significant financial harm to his clients. When facing legal action, he contemplates filing for bankruptcy to potentially discharge the punitive damages and attorneys’ fees he would be required to pay.

However, based on the Supreme Court’s decision in Cohen v. de la Cruz, Michael learns that all obligations arising from fraudulent conduct, including punitive damages, are not eligible for discharge in bankruptcy. He consults with an attorney to understand his legal responsibilities and explore potential settlement options.

Case Study 3: Bankruptcy Limitations

Emily, a business executive, faces severe financial consequences after being involved in a fraudulent scheme. With substantial fines and punitive damages looming, she considers filing for bankruptcy as a way to alleviate her debt burden.

However, she seeks legal guidance and discovers that not all debts can be discharged through bankruptcy. Her attorney helps her evaluate alternative debt resolution strategies and negotiate manageable payment arrangements with the affected parties.